na 


UhARY 


I      SAN  DIEGO 

^^^ffl^fc— 


RAILROADS  AND  GOVERNMENT 


BY 

FRANK  HAIGH   DIXON,  PH.D. 

PEOPESSOE  OF  ECONOMICS,  PEINCETON  UNIVERSITY 


CHARLES  SCRIBNER'S  SONS 

NEW  YORK          CHICAGO          BOSTON 


Copyright,  1922,  BT 

CHARLES  SCRIBNER'S  SONS 

A 


PRINTED  AT 

THE   SCRIBNER  PRESS 

NEW  YORK,  U.  S.  A. 


THIS    BOOK  IS  AFFECTIONATELY  INSCRIBED 
TO  THE   MEMORY  OF 

HENRY    CARTER    ADAMS 

SCHOLAR,  TEACHER,  FRIEND 

WHOSE   CONTRIBUTIONS   TO  THE   SOLUTION  OF  THE 

RAILROAD    PROBLEM   HAVE    PLACED   THE 

NATION  IMMEASURABLY  IN  HIS  DEBT 


PREFACE 

THE  purpose  of  this  book  is  to  take  up  the  story  of 
the  federal  regulation  of  railroads  in  the  United  States 
where  most  of  the  treatises  on  transportation  have 
dropped  it,  at  1910,  and  bring  the  history  down  to  the 
present  year.  There  is  no  intention  to  trace  from  the 
beginning  the  development  of  the  fundamental  princi- 
ples of  rate  regulation  upon  which  present  administra- 
tion relies.  This  has  been  admirably  done  by  others. 
Professor  Ripley's  two  scholarly  and  exhaustive  volumes — 
Railroads:  Rates  and  Regulation  and  Railroads:  Finance 
and  Organization — leave  little  to  be  said  on  the  period  that 
he  covers.  And  this  period  will  be  recalled  only  so  far 
as  is  necessary  to  create  a  background  for  the  later  his- 
tory. This  volume  is  written  by  a  teacher,  with  teachers 
primarily  in  mind,  and  it  is  hoped  that  it  may  serve  as 
a  supplement  to  existing  texts,  in  spite  of  its  obvious 
departure  at  times  from  that  nice  balancing  of  conflict- 
ing points  of  view  which  is  commonly  supposed  to  be 
the  outstanding  characteristic  of  the  academic  mind. 

But  the  book  has  quite  another  and  an  equally  impor- 
tant object.  Effort  has  been  made  to  relieve  the  discus- 
sion so  far  as  possible  of  technical  features  in  order  to 
beguile  the  general  reader  into  at  least  a  hasty  perusal. 
For  we  have  been  passing  through  an  extraordinary  dec- 
ade in  the  relations  of  railroads  and  government.  More 
experience  and  experiment  have  been  crowded  into  these 
ten  years  than  into  all  the  remainder  of  our  railroad 
history  of  nearly  a  century. 

We  have  employed  our  transportation  machine  as  a 


Vlll  PREFACE 

war  agency  to  an  extent  never  before  experienced,  and 
for  the  first  time  in  our  history  we  have  ventured  upon 
government  operation.  Whether  or  not  this  experi- 
ment may  legitimately  be  employed  as  an  argument  for 
or  against  nationalization  of  railroads  as  a  permanent 
policy,  the  twenty-six  months  of  federal  control  demon- 
strated the  soundness  and  practicability  of  many  proj- 
ects for  more  efficient  operation  under  private  auspices — 
projects  that  will  be  a  subject  of  lively  discussion  until 
they  are  realized  in  actual  practice. 

And  again  the  war  experiment  shook  us  out  of  a 
lethargic  state  into  which  we  seemed  to  have  fallen,  and 
started  us  with  renewed  vigor  on  the  task  of  solving  this 
perennial  railroad  problem.  Many  of  the  features  of 
the  Transportation  Act  of  1920  had  been  long  advocated, 
but  their  advocacy  had  fallen  on  deaf  ears.  And  sud- 
denly without  ostentation  and  almost  naturally  they  be- 
came a  part  of  our  regulating  statute. 

More  than  this,  the  railroads  are  now  officially  placed 
in  a  new  relation  to  the  public,  and  the  regulating  body 
is  imposed  with  a  mandate  that  requires  it  to  recognize 
this  relationship.  Congress  has  formally  declared  that 
it  is  the  business  of  the  Government  to  provide  the  pub- 
lic with  adequate  and  efficient  transportation  service 
and  to  assure  to  private  capital  the  revenue  needed  to 
accomplish  the  purpose.  A  new  responsibility  is  placed 
upon  the  Interstate  Commerce  Commission.  But  this 
very  fact  emphasizes  and  enforces  the  public  nature  of 
the  industry  with  which  we  are  dealing.  Railroad  execu- 
tives and  railroad  labor  are  warned  as  never  before  that 
they  are  administering  a  public  trust,  and  that  the  fu- 
ture policy  of  the  nation  will  be  influenced  by  the  char- 
acter of  their  stewardship. 

We  are  entering  then  upon  a  new  phase  of  the  rail- 
road problem,  in  which  knowledge  and  sound  wisdom  is 
called  for  from  the  electorate.  It  has  been  the  wish  of 


PREFACE  IX 

the  author  to  contribute  his  mite  to  an  intelligent  under- 
standing of  the  issue. 

It  is  desired  to  acknowledge  the  courtesy  of  the  re- 
spective editors  of  the  Quarterly  Journal  of  Economics, 
the  publications  of  the  American  Economic  Association, 
and  the  Carnegie  Economic  Studies  of  the  War  for  per- 
mission to  use  in  condensed  form  portions  of  articles 
that  have  appeared  under  their  auspices.  The  author 
rests  under  especial  obligation  to  Dr.  Julius  H.  Parme- 
lee,  Director,  and  Mr.  Richard  H.  Johnston,  Librarian,  of 
the  Bureau  of  Railway  Economics,  in  Washington,  who 
have  placed  unreservedly  at  his  disposal  their  advice 
and  services,  and  their  unrivalled  collection  of  printed 
and  manuscript  material  on  railroad  problems. 

FRANK  HAIGH  DIXON. 


CONTENTS 


I.    INTRODUCTION 


Conditions  under  which  the  Interstate  Commerce  Commission 
developed — Reasons  for  its  lack  of  accomplishment  in  its  early 
years — Amendments  of  1906 — The  plan  of  this  volume. 


FEDERAL  REGULATION,  1910  TO  1916 

II.  RATE  REGULATION      . 7 

Power  to  suspend  rates — Reasoning  upon  which  the  amendment 
was  based — Burden  of  proof  thrown  on  the  carrier — English  v. 
American  practice — Attempt  to  require  advance  approval  of  rate 
increases — Railroad  co-operation  in  rate  procedure — Rate  cases, 
1910  to  1916 — Disagreement  in  the  Commission  concerning  its 
function  in  rate-making — Financial  situation  of  roads,  1908  to  1916 — 
Causes  for  decline  in  railroad  credit — Forwarding  Case — New 
York  Harbor  Case — North  Dakota  Coal  Case  and  Norfolk  and 
Western  Passenger  Case. 

III.  THE  LONG  AND  SHORT  HAUL 28 

History  of  the  long  and  short  haul  clause  to  1910 — Amendment  of 
1910 — The  problem  hi  the  South  concerning  both  passenger  and 
freight  traffic — The  trans-continental  situation — Establishment  of 
the  zone  principle  and  the  differential — History  of  trans-continen- 
tal rates  to  1921 — Commissioner  Lane  on  rate  policy — Supreme 
Court  on  the  water-competition  clause. 

IV.  THE  COMMERCE  COURT 43 

Its  functions — Defense  by  Attorney-General — Illinois  Central  Coal- 
Car  Distribution  Case — Goodrich  Transit  Co.  Case — Pacific  Coast 
Switching  Cases — Procter  &  Gamble  Case — The  Lemon  Case — 
Summary  of  the  controversy  between  court  and  Commission — 
Reasons  for  the  abolition  of  the  court. 

V.  ADMINISTRATIVE  ACTIVITIES 52 

General  increase  in  powers — The  pipe-line  amendment,  i.  Dis- 
crimination— Tap-lines.  2.  Commodities  clause — Judicial  history — 
The  Reading  Case — The  policy  of  the  Commission — 3.  Express 
rates — Zone  system  of  rate-making.  4.  Mail  pay — History  of  the 
controversy — Commission's  decision  of  1919.  5.  Accounting — His- 

xi 


Xll  CONTENTS 

tory  of  Section  20  and  development  of  accounting  regulations  fol- 
lowing amendment  of  1906 — Inspection  of  accounts — Violations  of 
accounting  regulations — Court  cases — Depreciation — Separation  of 
operating  expenses.  6.  Valuation — The  Act  of  1914 — Work  of  the 
Bureau  of  Valuation — Valuation  theories  of  the  Commission — Im- 
portance of  the  valuation.  7.  Safety  measures — Jurisdiction  of  the 
Commission — Block-signals — Failure  of  the  human  element — Tres- 
passing— The  automatic  stop — Hours  of  Service  Law. 

VI.  RELATIONS  OF  RAIL  AND  WATER  LINES  .     .     .     .    81 

Unreality  of  water  competition — Statutory  power  of  Commission 
over  water  traffic — Panama  Canal  Act — Intercorporate  relation- 
ships of  water  and  rail  carriers — Commission's  interpretation  of  the 
Panama  Canal  Act  and  its  consequences — Regulation  of  physical 
connections  at  ports  and  docks. 

VII.  THE  LABOR  PROBLEM 89 

Development  of  "concerted"  movements — National  legislation,  the 
Erdman  Act — The  Newlands  Act — Wage  controversies,  1910  to 
1916 — Weaknesses  of  the  arbitration  method — The  movement  for 
the  eight-hour  day  in  train-service — Passage  of  tie  Eight-hour  Law 
— Its  constitutionality  tested — Report  of  the  Eight-hour  Commis- 
sion— Estimate  of  wage  increases. 


THE  WAR  PERIOD 
VEIL    THE  RAILROADS'  WAR  BOARD 107 

Railroad  organization  for  Mexican  border  troubles — Functions  of 
Council  of  National  Defense — Creation  of  Railroads'  War  Board — 
Existing  legislation  applicable  to  the  emergency — Car-service  or- 
ganization— Esch  Car-Service  Act — Priority  Act — Distribution  and 
allocation  of  equipment — Heavier  loading  and  more  rapid  move- 
ment— The  troop  movement — Statistics  of  operating  efficiency— 
Failure  of  complete  achievement  by  the  War  Board. 

LX.    FEDERAL  CONTROL 119 

Operating  conditions  at  the  time  tie  Government  took  possession — 
The  reasons  for  action  by  the  President — The  presidential  proclama- 
tion— The  Federal  Control  Act — The  standard  contract — The  pro- 
vision for  maintenance  of  property — Controverted  questions — Con- 
tracts signed — Was  the  compensation  a  fair  one? — The  "short-line" 
situation  and  contract. 

X.    FEDERAL  OPERATION 133 

Administrative  organization — Economies  in  service — Elimination 
of  passenger  service — The  desirability  of  such  methods  in  normal 
times — Unification  of  terminal  facilities — The  terminal  problem — 
The  permit  system — Administration  of  marine  terminals — Reduc- 
tion of  salaries  of  executives— Short-routing  of  freight— "Sailing- 


CONTENTS  Xlll 

day  ""plan — Solid  train-loads — Administration"  of  the  "car-supply — 
Results  of  the  pooling  system — Miscellaneous  contributions  to  effi- 
cient operation — The  consolidated  ticket  office — Its  future — Its  le- 
gality— Advertising  and  soliciting — Operating  Statistics  Section — 
Accounting — Standardized  maintenance — Standardization  in  manu- 
facture of  locomotives  and  cars — Controversy  over  the  allocation 
of  cars — Unification  of  express  companies — The  express  contract — 
Government  operation  of  coastwise,  canal,  and  river  lines — Experi- 
ence with  the  New  York  Barge  Canal — The  two  purposes  of  the 
federal  administration — Summary  of  operating  results — The  situa- 
tion after  the  armistice. 

XI.  RATE  REGULATION 158 

Rate  increases — Effect  of  the  increases  contrasted  with  Adminis- 
tration predictions — Should  the  increase  have  been  greater  and  more 
frequent? — Uniform  classification. 

XII.  RELATION  OF  THE  RAILROAD  ADMINISTRATION  TO 

OTHER  REGULATING  AGENCIES 167 

Effect  of  federal  control  upon  the  statutory  rights  of  railroads — 
Interstate  Commerce  Commission  deprived  of  its  powers — Develop- 
ment of  traffic  conferences — Attempt  to  restore  Commission's  au- 
thority— Division  of  Public  Service — Willamette  Valley  Lumber- 
men's Association  Case — Long  and  short  haul  cases — Relation  of 
federal  administration  to  state  authorities — North  Dakota  Case. 

XIII.  THE  GOVERNMENT  AND  LABOR 177 

Labor  conditions  at  the  outbreak  of  the  war — The  President  and 
the  Brotherhoods — Award  of  the  Railroad  Wage  Commission — 
Adjustment  boards — Statistics  of  wage  increases — Dilatoriness  of 
the  Government  in  handling  the  wage  problem — Success  of  the  bi- 
partisan adjustment  boards — Development  of  standard  rules  and 
working  conditions — The  eight-hour  day — The  national  agree- 
ments— Gains  to  labor  from  the  Government  policy — The  question 
of  labor  efficiency  during  federal  operation. 

XIV.  FINANCIAL  RESULTS.   SUMMARY  OF  FEDERAL  OPER- 

ATION   191 

Summary  of  contract  terms — Funds  available  to  Administration  by 
Congressional  grant — Operating  deficit — The  maintenance  section 
of  the  contract — The  controversy  and  its  probable  outcome — Physi- 
cal condition  of  the  properties — Government's  policy  concerning 
capital  expenditures — Financial  statement — Allocation  of  equip- 
ment— Miscellaneous  investments — Statutory  provisions  relating  to 
the  guarantee  period — Payments  withheld  by  the  Treasury — Con- 
gressional relief — The  Funding  Bill — Arguments  pro  and  con — 
Use  of  the  revolving  fund — Summary  of  federal  operation — The  first 
year  a  necessity  and  on  the  whole  a  success — The  second  year  one 
of  waiting  and  hence  unsatisfactory — Was  the  Administration 
wasteful  and  inefficient? — Director-General  Hines's  opinion. 


XIV  CONTENTS 


THE  RETURN  TO  PRIVATE  OPERATION 

XV.  THE  PROBLEM  OF  RECONSTRUCTION  AND  THE  ACT 

OF  1920 213 

Necessity  for  Congressional  action — Previous  investigation  by 
Congress — The  President's  message — Director-General  McAdoo's 
plan — Proposals  of  the  Interstate  Commerce  Commission — Plan  of 
Association  of  Railway  Executives — Controversy  over  the  place  of 
the  bondholder  in  management — Summary  of  proposals  for  legisla- 
tion— The  Plumb  Plan — Legislative  history  of  the  Transportation 
Act  of  1920 — The  guarantee  period — Continuation  of  the  conditions 
of  the  war  contract — Rates  not  to  be  reduced  before  September 
i,  1920. 

XVI.  THE  PROBLEM  OF  RATES 227 

The  rate  section  of  the  Act  of  1920 — Does  not  contain  a  guarantee — 
The  return  is  on  property,  not  securities — Elasticity  to  limitation 
on  earnings — The'  problem  of  competing  roads — Constitutionality 
of  recapture  plan— Obstacles  to  its  practical  working — Effect  upon 
provision  of  new  capital — Determination  of  property  value-j-The 
rate  decision  of  July,  1920-yThe  New  England  rate  situation — 
General  results  of  the  rate  increases — Significant  features  of  the 
rate  section. 

XVII.  THE  PROBLEM  OF  RATES  (CONTINUED)     .     .     .  247 

i.  Rate  suspension — Development  in  administrative  efficiency  of 
Commission — Reorganization  of  procedure — Shortened  period  of 
rate  suspension — Economic  objections  to  refunding  provision — The 
legal  status  of  the  reparation  process — Administrative  objections  to 
refunding  process.  2.  Long  and  short  haul — The  Commission's 
rulings  made  a  part  of  the  statute — Decline  in  river  competition. 
3.  Minimum  rates — Attitude  of  the  public  in  the  past — Economic 
consequences  of  lack  of  control  of  the  minimum — Amendment  of 
1920. 

XVIII.  THE   CONFLICT  OF  JURISDICTION,   STATE   AND 

INTERSTATE 258 

History  of  the  controversy — The  safety-appliance  decision — The 
Minnesota  and  Shreveport  Cases — The  Act  of  1920 — Interpretation 
by  Commission  in  enforcing  its  rate  decision — The  New  York  and 
Illinois  Cases — Method  of  procedure,  the  Arkansas  Case — Signifi- 
cance of  this  position,  if  sustained. 

XIX.  RAILROAD  CONSOLIDATION  AND  FEDERAL  INCORPO- 

RATION       268 

Compulsory  v.  voluntary  consolidation — Partial  and  complete  con- 
solidation— The  provisions  of  the  statute — John  E.  Oldham's  plan — 


CONTENTS  XV 

It  demonstrates  the  reasonableness  of  the  statutory  schemes-Earlier 
attempts  at  combination  untimely — Purpose  of  consolidation — 
Competition  in  service  v.  competition  in  rates — Constitutionality — 
Desirability  of  consolidation — Pooling  permitted — Will  this  be  of 
importance  ? — Consolidation  of  the  express  companies  and  the  new 
contract  with  the  railroads — The  express  company  a  superfluous 
agency — Federal  incorporation — Arguments  for  and  against  it — The 
federal  holding  company. 

XX.  FEDERAL  REGULATION  OF  CAPITALIZATION  .     .     .  284 

Earlier  attempts  at  legislation — The  Federal  Securities  Commis- 
sion— Relation  of  capitalization  to  rates — Relation  of  capitaliza- 
tion to  credit  standing — Dishonest  financial  management — Recent 
examples — Weakness  of  state  control  of  capitalization — Provisions 
of  Act  of  1920 — Prohibition  of  intercorporate  directors  and  offi- 
cers— Relation  of  the  bankers  to  the  railroads — Holding  companies — 
The  Burlington  and  Lackawanna  stock  increases — Capitalization  of 
surplus — Position  of  the  Commission. 

XXI.  ADMINISTRATIVE  POWERS 300 

i.  Service — Effect  of  competition  upon  service — Private-car  prob- 
lem— Amendments  of  1920  concerning  car-service — Emergency 
powers — Their  exercise  by  the  Commission — Certificate  of  public 
convenience.  2.  Accounting  and  statistics — Depreciation  rates  to 
be  prescribed  by  the  Commission — Access  to  correspondence — Ap- 
portionment of  expenses — Accumulation  of  commodity  statistics — 
New  classification  of  employees.  3.  Cash  payment  of  freight  bills — 
Removal  of  discriminations. 

XXII.  REGULATION  OF  WAGES  AND  WORKING  CONDI- 

TIONS  310 

Condition  of  labor  at  the  close  of  federal  operation — Two  legislative 
proposals,  the  anti-strike  provision  and  the  bipartisan  mediation 
boards — Labor  provisions  of  the  Act  of  1920 — Wage  increases  of 
1920 — Bases  of  the  decision — Reduction  of  wages  in  1921 — Viola- 
tions of  the  Act — The  Erie  Railroad  Case — National  agreements — 
Their  character  and  origin — The  issue  before  the  Labor  Board — 
Decision  of  the  Board — Labor  code  promulgated — Its  significance — 
Failure  of  adjustment  boards — The  issue  on  the  Pennsylvania — Re- 
lation of  the  Labor  Board  to  the  Interstate  Commerce  Commission. 


XXIII.    REGULATION  OF  WATER  TRAFFIC 335 

Procedure  at  the  end  of  federal  control — New  York  Barge  Canal 
experience — Withdrawal  of  Government  craft  from  the  New  York 
Barge  Canal — Congressional  declaration  concerning  water  transpor- 
tation— Jurisdiction  of  Commission  over  domestic  portion  of  export 
commerce — Conflict  of  jurisdiction  between  Commission  and  Ship- 
ping Board — Criticism  of  our  water-transportation  policy. 


XVI  CONTENTS 

XXIV.    THE  FUTURE 340 

The  railroad  problem  not  solved — A  line  of  development  suggested — 
Government  ownership — Government  operation — Economic  and 
political  objections — Co-operative  economies  in  operation — The 
terminal  problem — Terminal  costs — Allocation  of  equipment — 
Proposals  of  Association  of  Owners  of  Railroad  Securities — The  labor 
problem — National  organization  and  local  negotiation — Participa- 
tion of  employees  in  management — Compulsory  arbitration  a  de- 
sirable goal — Competition  of  the  motor-truck  and  necessity  for  co- 
operation— Water  competition  and  co-operation — Railroad  policy — 
A  programme  of  cp-pperation  supervised  by  the  Commission — The 
Commission's  administrative  independence  must  be  maintained. 


APPENDICES 
I.    BIBLIOGRAPHICAL  NOTE 367 

II.    TENTATIVE  PLAN  FOR  RAILROAD  CONSOLIDATION     .'  369 
INDEX 379 


RAILROADS  AND  GOVERNMENT 

CHAPTER  I 

INTRODUCTION 

WITH  the  creation  of  the  Interstate  Commerce  Com- 
mission, in  1887,  the  relationship  of  the  federal  govern- 
ment to  the  railroads  assumed  an  importance  for  the 
public  that  it  had  never  before  possessed.  For  the  first 
time  a  body  endowed  with  executive  and  judicial  func- 
tions— what  was  to  be  known  as  an  administrative  body — 
was  to  take  a  position  as  an  arbiter  between  the  public 
and  our  national  transportation  system.  The  plan  had 
been  tried  for  a  decade  or  two  in  some  of  the  states.  It 
was  now  to  be  given  a  wider  opportunity  and  a  more 
critical  test. 

Why  the  Commission  appeared  at  this  particular  time 
was  apparent  from  the  report  of  the  Senate  Committee 
that  proposed  the  bill,  and  from  the  spirit  of  the  Act  it- 
self. It  was  primarily  to  put  an  end  to  discriminations 
and  rebates,  and  it  was  to  protect  the  public  against 
excessive  charges.  Naturally  such  an  agency  was  re- 
garded with  hostility  by  the  railroads.  In  a  measure  it 
returned  the  sentiment  in  kind.  For  it  looked  upon  it- 
self as  the  guardian  of  the  public  interests  against  exploi- 
tation by  private  corporations. 

It  was  in  this  atmosphere  of  open  hostility  and  con- 
tempt on  the  one  hand,  and  frank  suspicion  on  the  other, 
that  a  considerable  part  of  the  first  two  decades  of  the 
Commission's  history  was  passed.  Little  of  enduring  na- 
ture was  accomplished  by  the  regulating  body  during 
this  time,  beyond  that  of  acquiring  a  technical  knowl- 


2  RAILROADS   AND    GOVERNMENT 

edge  of  the  intricacies  of  the  railroad  business  and  lay- 
ing a  foundation  of  experience  in  railroad  control.  The 
only  legislation  of  any  effectiveness  enacted  during  this 
stage  was  the  Elkins  Anti-Rebate  Act  of  1903,  passed  at 
the  instance  of  the  railroads  themselves. 

This  sterility  of  accomplishment  had  many  causes.  In 
the  first  place,  the  country  lacked  any  thorough  knowl- 
edge of  the  problem  it  was  attempting  to  solve.  It  was  a 
case  of  rinding  one's  way  step  by  step  and  discovering  the 
right  path  by  the  indirect  process  of  following  blind  leads. 
This  applied  both  to  the  Commission  and  to  Congress. 
The  statute  was  quite  inadequate  to  the  task  set  for  it, 
and  its  weaknesses  revealed  themselves  as  soon  as  any 
reliance  was  placed  upon  it.  Time  after  time  the  Com- 
mission sought  the  aid  of  the  courts  in  the  enforcement  of 
its  powers  only  to  find  that  the  law  upon  which  it  leaned 
was  a  broken  reed. 

While  containing  at  times  men  of  unusual  ability,  the 
Commission  included  few  who  had  had  any  previous  con- 
tact with  the  railroad  problem.  And  some  of  the  com- 
missioners obviously  failed  to  measure  up  to  their  respon- 
sibilities. On  the  whole,  however,  the  Commission  grew 
in  authority  and  influence,  and  but  for  obstacles  which 
were  insurmountable  would  have  shown  a  considerable 
accomplishment  for  its  first  twenty  years  of  investigation 
and  experiment. 

Besides  the  inadequacy  of  the  statute  which  judicial 
decisions  exposed,  the  Commission  had  to  reckon  with  the 
jealousy  and  the  ill-concealed  suspicion  of  the  judiciary 
itself.  This  novel  administrative  body  was  to  assume 
functions  that  had  theretofore  been  from  time  immemorial 
the  exclusive  possession  of  the  courts.  It  was  natural 
that  the  activities  of  the  upstart  should  be  resented.  It 
was  no  mere  accident  that  early  in  the  career  of  the  Com- 
mission a  federal  court  should  decide  that  while  the 
Commission's  evidence  before  the  courts  must  be  accepted 


INTRODUCTION  3 

as  prima  facie,  the  courts  had  the  right  to  consider  the 
case  anew  from  the  beginning.  Judges  were  by  tempera- 
ment and  training  conservative.  They  did  not  readily 
adjust  their  minds  to  the  introduction  of  new  methods  of 
control  and  discipline  into  the  field  of  public-service  law. 
The  Supreme  Court,  in  the  Texas  and  Pacific  Case  in 
I896,1  expressed  well  the  spirit  in  which  the  judiciary 
approached  this  novel  problem:  "It  must  not  be  over- 
looked that  this  legislation  is  experimental.  Even  in  con- 
struing the  terms  of  a  statute,  courts  must  take  notice 
of  the  history  of  legislation,  and  out  of  different  possible 
constructions,  select  and  apply  the  one  that  best  com- 
ports with  the  genius  of  our  institutions  and,  therefore, 
most  likely  to  have  been  the  construction  intended  by 
the  lawmaking  power."  But  what  is  the  "genius  of  our 
institutions"  and  would  the  court  define  this  in  the  same 
terms  as  would  an  Interstate  Commerce  commissioner  ? 

One  of  the  favorite  arguments  of  the  railroads  in  1906 
against  an  increase  in  the  Commission's  powers  was  that 
the  Commission  had  shown  itself  inefficient  and  ill 
adapted  to  its  job,  as  revealed  by  the  numerous  reversals 
of  its  decisions  sustained  at  the  hands  of  the  Supreme 
Court.  But  such  argument  was  wholly  disingenuous. 
Beyond  the  weakness  of  the  law  itself  and  the  hostility 
of  the  judiciary  already  alluded  to,  there  was  evident  a 
settled  policy  on  the  part  of  the  Commission  to  arouse 
public  interest  in  favor  of  strengthening  the  law  by  the 
device  of  revealing  its  weaknesses.  It  was  a  shrewd  pro- 
gramme which  amply  justified  itself  in  the  amendments 
of  1906. 

It  was  in  1906  that  the  railroads  fought  their  fight  to 
a  finish  against  federal  regulation.  No  such  reckless  pub- 
licity campaign  was  ever  known  before  in  the  history  of 
railroad  control  and  it  is  probable  that  none  ever  will  be 
again.  Backed  by  President  Roosevelt  and  an  aroused 
1 162  U.  S.,  218. 


4  RAILROADS   AND    GOVERNMENT 

public  sentiment,  Congress  revolutionized  the  Act  to 
Regulate  Commerce,  and  the  Commission  was  now  for 
the  first  time  in  position  actually  to  prescribe  rates  for 
the  future.  Moreover,  it  was  at  this  time  that  the  ad- 
ministrative authority  of  the  Commission  was  clearly 
established.  Congress  made  the  decisions  of  the  Com- 
mission final,  except  when  they  came  into  conflict  with 
the  Constitution  and  with  questions  of  fundamental  law. 
With  this  series  of  amendments,  the  abdication  of  the 
courts  begins. 

But  for  reasons  that  will  appear  later,  the  statutory 
structure  was  not  yet  complete.  In  1910  Congress  again 
enlarged  the  powers  of  the  Commission,  and  strengthened 
weak  spots  in  the  law  which  in  the  fight  of  1906  had  been 
either  overlooked  or  necessarily  laid  aside  until  a  more 
convenient  season.  With  the  Act  of  1910  begins  our  con- 
sideration of  the  relations  of  railroads  and  government. 

It  is  not  the  purpose  of  this  book  to  analyze  in  detail 
the  Interstate  Commerce  Act  or  the  system  of  regulation 
gradually  constructed  during  the  first  quarter-century  of 
federal  railroad  control.  That  task  has  been  well  done 
by  others.  Here  the  plan  is  to  consider  those  significant 
additions  to  governmental  authority  that  developed  be- 
tween 1910  and  1916,  and  to  follow  this  with  a  critical 
analysis  of  the  period  of  federal  operation,  in  which  an 
attempt  will  be  made  to  discover  such  features  as  are  of 
permanent  value  for  our  problem  of  regulation.  Finally 
attention  will  be  given  to  the  Transportation  Act  of  1920, 
which  returned  the  roads  to  their  owners  and  introduced 
many  novel  features  into  our  regulating  policy. 


FEDERAL  REGULATION,  1910  TO  1916 


CHAPTER  II 

RATE   REGULATION 

THE  Act  of  1910  originated  with  the  Administration. 
Out  of  conferences  of  President  Taft  with  members  of 
Congress  and  the  Interstate  Commerce  Commission,  with 
railroad  officers  and  others,  there  appeared  a  bill  drawn 
by  the  Attorney-General,  which  was  introduced  into  both 
Houses  of  Congress.  In  conformity  with  pledges  of  the 
Republican  platform  upon  which  the  President  had  been 
elected,  it  contained  provisions  for  traffic  agreements  be- 
tween paralleling  roads  and  for  federal  control  of  capi- 
talization. A  considerable  portion  had  to  do  with  the 
creation  of  a  new  court  and  this,  as  it  turned  out,  was  al- 
most the  only  portion  of  the  bill  that  was  retained  in  its 
original  form.  For  the  regulation  of  security  issues  there 
was  substituted  an  investigating  commission.  The  valua- 
ble features  of  the  Act  originated  in  Congress  and  were 
wrung  from  the  Republican  leaders  by  the  "insurgent" 
element  that  stood  for  more  effective  regulation,  assisted 
in  many  cases  by  the  votes  of  the  Democrats.  In  the 
Act  as  passed  there  were  but  two  amendments  of  funda- 
mental significance,  one  conferring  the  power  to  suspend 
rates,  the  other  resuscitating  the  long  and  short  haul  * 
clause.  These  two  amendments  will  be  discussed  in 
successive  chapters. 

Power  to  suspend  rates  and  pass  upon  their  reasonable- 
ness in  advance  of  their  effective  date  was  not  contem- 
plated in  the  bill  introduced  under  the  aegis  of  the  Presi- 
dent. This  was  one  of  the  fruits  of  the  insurgent  move- 
ment. It  was  greatly  assisted  by  the  nation-wide  move- 

7 


8  RAILROADS  AND  GOVERNMENT 

merit  of  the  railroads  for  an  increase  in  rates  just  at  the 
time  when  the  bill  was  under  discussion.  The  action  of 
the  individual  carriers  in  filing  schedules  of  increased 
rates  was  so  nearly  simultaneous  as  to  appear  collusive. 
At  any  rate,  the  occasion  was  seized  upon  by  the  Ad- 
ministration to  secure  an  injunction  restraining  twenty- 
four  carriers  from  putting  into  effect  higher  rates,  upon 
the  ground  that  their  action  constituted  a  violation  of 
the  Anti-Trust  Act.  Whether  a  prosecution  was  con- 
templated and  whether  it  would  have  succeeded  if  at- 
tempted, is  beside  the  point.  The  carriers  withdrew  their 
tariffs,  but  the  popular  effect  remained,  and  the  sus- 
pension clause  became  law.  This  amendment  to  Sec- 
tion 15  provided  that  whenever  there  was  filed  with  the 
Commission  any  new  rate  or  classification  or  regulation, 
the  Commission  should  have  power,  either  upon  com- 
plaint or  on  its  own  initiative  and  after  reasonable  no- 
tice, but  without  any  formal  answer,  to  enter  upon  a 
hearing  concerning  the  propriety  of  the  rate.  Pending 
the  hearing,  it  should  have  the  power,  after  delivering  a 
statement  in  writing  to  the  carrier  of  its  reasons  therefor, 
to  suspend  the  rate  for  1 20  days  beyond  the  effective  date 
of  the  tariff.  If  the  hearing  was  not  completed  at  the 
end  of  this  time,  the  Commission  might  extend  the 
period  of  suspension  for  another  six  months,  but  at  the 
end  of  that  time — ten  months  from  the  effective  date — 
the  tariff  went  into  force  if  no  adverse  order  had  mean- 
while been  issued  by  the  Commission.  Power  to  make 
an  order  concerning  these  suspended  rates  was  as  com- 
plete as  though  the  rates  had  gone  into  effect,  and  the 
Commission  were  acting  in  response  to  the  complaint  of 
an  injured  shipper. 

It  is  of  importance  to  follow  the  reasoning  that  led  to 
the  adoption  of  this  amendment.  Since  1906  the  Com- 
mission had  had  the  power  to  prescribe  maximum  rates 
upon  complaint,  but  the  complaint  had  to  be  the  result 


ia^  ,  i 

ain  a 
:d,  in  y 

*-.  jo- 


RATE   REGULATION  9 

of  actual  experience  of  their  effects.  It  was  the  shipper's 
business  to  demonstrate  the  unreasonableness  of  the  rate. 
If  he  succeeded  in  his  demonstration,  he  could  obtain  a 
lower  rate  for  the  future  and  he  might  be  awarded 
addition,  reparation  for  his  loss.  But  if  he  was  a  shipper 
with  small  capital  engaged  in  a  competitive  business,  he 
might  be  on  the  rocks  before  help  could  arrive.  Repara 
tion,  while  of  some  value  as  a  penalty,  is  no  solution  of  the 
problem.  Its  working  is  slow,  cumbersome,  costly.  It 
does  not  restore  to  the  shipper  what  he  has  lost.  Sacrifice 
of  business  to  a  competitor  who  has  been  profiting  by  a 
lower  rate  is  not  in  any  sense  compensated  for  by  the  re- 
turn of  the  excess  over  what  the  competitor  paid. 

Before  the  passage  of  this  amendment,  the  shipper  at 
times  invoked  the  aid  of  the  equity  courts  to  restrain 
advances  in  rates.  But  aside  from  the  technical  question, 
much  in  dispute,  whether  courts  could  exercise  the  power 
of  injunction  in  rate  matters  after  a  federal  body  had  been 
especially  created  for  the  purpose  of  passing  upon  rates, 
injunctions  could  issue  only  in  favor  of  the  petitioners 
and  only  upon  the  filing  of  a  bond.  A  decision  in  favor  of 
the  petitioners  was  of  no  value  in  settling  the  funda- 
mental question  at  issue,  and  did  not  prevent  another 
violation  when  different  parties  were  involved,  and  a  bond 
was  expensive,  in  many  cases  prohibitive.  Moreover,  , 
the  jurisdiction  of  the  court  runs  only  in  its  own  circuit, 
and  there  was  no  assurance  of  harmony  in  action  among 
the  courts  of  various  contiguous  jurisdictions.  In  a 
word,  the  judicial  process  was  ill  fitted  to  handle  cases  of 
this  character;  in  fact,  the  whole  system  of  administrative 
regulation  was  a  revolt  from  the  earlier  processes  of  the 
law-courts. 

But  there  was  another  and  more  significant  aspect  of 
this  problem  of  rate  suspension.  In  the  majority  of  cases, 
the  shipper  or  the  consignee  had  added  the  freight  charges 
to  the  price  of  his  goods,  and  they  had  been  borne  by 


10  RAILROADS  AND   GOVERNMENT 

the  ultimate  consumer,  who  was  not  a  party  to  any  ac- 
tion between  carrier  and  shipper  and  had  no  standing 
in  court.  The  extent  to  which  the  consumer  "pays  the 
freight"  cannot  be  determined  with  any  accuracy.  A 
careful  analysis  would  require  knowledge  as  to  the  char- 
acter of  the  contract  between  shipper  and  consignee  and 
the  competitive  conditions  under  which  producer  or 
shipper  was  handling  his  business.  But  after  all,  in  the 
long  run,  transportation  costs  find  their  way  into  price, 
and,  as  already  intimated,  there  is  no  manner  in  which  the 
final  purchaser  of  goods  can  recover  for  the  burden  of  an 
unreasonable  freight  charge  imposed  upon  the  goods  he 
buys.  In  any  case  in  most  instances  the  amount  is  so 
small  for  the  individual  that  he  would  be  indifferent  to 
the  abuse. 

This  aggregate  of  individuals  making  up  the  vast  con- 
suming public  can  have  no  representation  in  the  matter 
except  through  the  Commission  created  by  law  to  pass 
upon  the  reasonableness  of  rates,  and  the  degree  of  pro- 
tection afforded  depends  upon  whether  this  official  body 
can  determine  the  justness  and  reasonableness  of  rates 
in  advance  of  their  actual  inauguration.  A  rate  long  in 
existence  is  presumptively  reasonable,  and  no  serious 
hardship  can  arise  if  a  postponement  of  the  new  rate  is 
made  pending  an  examination  as  to  its  justice.  Such  was 
the  reasoning  that  led  to  the  adoption  of  the  suspension 
clause  and  has  made  it,  apparently,  a  permanent  part  of 
our  regulating  machinery.  For  the  changes  made  in  the 
procedure  in  1920,  to  which  reference  will  be  made  later, 
were  minor  modifications  that  did  not  disturb  the  funda- 
mental principle. 

As  a  logical  result  of  the  suspension  method,  it  was  pro- 
vided that  thereafter  the  burden  of  proof  was  to  be  on 
the  carrier  to  show  that  the  increased  rates  proposed 
were  just  and  reasonable.  This  threw  upon  the  carrier 
the  burden  of  proving  that  the  new  rate  as  a  whole  was 


RATE  REGULATION  II 

; 

reasonable — not  that  the  increase  in  the  rate  over  the  pre- 
existing rate  was  a  reasonable  increase.  In  this  respect 
the  law  differed  from  that  in  England.  There  the  pre- 
vailing rates  had  by  statute  been  declared  reasonable 
and  only  the  increase  had  to  be  justified.  Here  the 
whole  question  of  the  reasonableness  of  the  fundamental 
rate  could  be  reopened.1  The  practical  result  of  this 
necessary  interpretation  of  our  law  has  been  an  unjusti- 
fiable and  endless  stirring  up  of  our  rate  structure.  Agen- 
cies have  been  established  for  the  sole  purpose  of  secur- 
ing paid  freight  bills  from  shippers  with  power  of  attor- 
ney to  bring  complaints.  As  long  as  the  Commission  had 
power  to  prescribe  only  maximum  rates,  the  carrier  was 
free  to  set  a  rate  at  some  lower  point  and  thus  upset  an 
adjustment  to  which  a  group  of  carriers  had  agreed. 
Orders  of  the  Commission  formerly  held  for  but  two 
years2  and  unreasonable  situations  which  had  been  re- 
lieved by  the  Commission's  order  frequently  appeared 
again  immediately  upon  the  expiration  of  the  order. 
Parties  who  might  be  affected  by  a  decision,  whether  car- 
rier or  shipper,  refrained  from  intervening  or  appearing 
in  a  case  in  order  to  be  free  to  attack  a  rate  once  estab- 
lished or  secure  a  rehearing.  By  these  and  many  other 
technical  processes,  litigation  was  kept  alive,  and  the 
plan  of  regulation  resolved  itself  "largely  into  a  sort  of 
continuous  moving  around  in  a  circle."  Very  properly, 
the  Commission  protested  against  the  employment  by 
the  carrier  of  its  freedom  to  initiate  rates,  to  disturb  ad- 
justments recognized  as  reasonable  and  fair  by  the  large 
majority  of  shippers  and  carriers. 

This  absurd  situation  in  which  shippers  were  at  liberty 

1  See  discussion  of  English  and  American  practice  in  Western  Advance 
Rate  Case,  20  I.  C.  C.,  310-12. 

2  Under  the  Act  of  1920  orders  of  the  Commission  continue  in  force 
until  further  order  or  for  a  specified  period  named  in  the  order.     Section 
15  (2). 


12  RAILROADS  AND  GOVERNMENT 

to  attack  as  unreasonable  rates  long  in  existence,  against 
which  there  were  only  trivial  objections,  led  the  Com- 
mission to  recommend  that  Congress  follow  the  English 
Parliament  and  formally  legalize  existing  rates.  After 
noting  that  at  this  time  (1916)  rates  had  been  open  for 
complaint  for  ten  years  before  a  Commission  clothed 
with  rate-making  power,  and  had  been  subject  to  suspen- 
sion for  six  years,  the  Commission  said:  "We  are  con- 
vinced that  the  best  interests  of  the  entire  public,  of  the 
system  of  governmental  regulation  of  rates,  and  of  the 
railroads  will  be  served  by  the  enactment  of  a  statute 
which  as  of  a  specified  date  fixes  the  existing  interstate 
rates,  fares,  classifications,  rules,  regulations  and  charges 
as  just  and  reasonable  for  the  past,  and  which  provides 
that  after  that  date  no  change  therein  may  be  made  ex- 
cept upon  order  of  the  Commission.  .  .  .  The  adoption 
of  such  a  plan  as  this  would  make  it  possible  to  apply  the 
energies  expended  upon  rate  controversies  in  the  direc- 
tion of  constructive  work  for  the  future  instead  of  expend- 
ing them  upon  controversies  as  to  reparation  for  the  past, 
with  every  probability  that  in  a  majority  of  the  cases 
the  one  who  ultimately  bore  the  charge  will  never  be 
reached  by  the  reparation."1  This  important  proposal 
has  never  been  acted  upon  by  Congress. 

Placing  on  the  carrier  the  burden  of  proof  as  to  rea- 
sonableness lightened  the  Commission's  task  in  the  ex- 
tended rate  hearings  in  the  summer  of  1910,  for  the  Com- 
mission had  not  to  decide  that  the  rates  filed  by  the  car- 
riers were  actually  unreasonable,  but  only  that  the  car- 
riers had  failed  to  establish  their  reasonableness.  It  is 
this  negative  attitude  of  the  Commission  during  the  years 
from  1910  to  1916  to  which  the  railroads  attribute  many 
of  their  ills. 

At  the  time  the  rate-suspension  amendment  was 
adopted,  there  was  a  determined  effort  on  the  part  of  the 
1  Annual  Report,  1916,  p.  78. 


RATE  REGULATION  13 

insurgents  to  secure  the  incorporation  of  a  provision  that 
rates  should  not  go  into  effect  without  the  previous  ap- 
proval of  the  Commission.  They  failed  in  their  efforts, 
securing  instead  a  power  of  suspension  for  a  ten  months' 
period,  within  which  it  was  assumed  the  Commission 
could  determine  practically  all  cases.  But  in  August, 
1917,  another  attempt  was  made  to  secure  the  adoption 
of  this  principle.  The  amendment  had  a  checkered  career 
in  the  two  Houses,  and  finally  was  passed  in  the  form  of  a 
provision  that  until  January  i,  1920,  no  increased  charge 
could  be  filed  except  after  approval  by  the  Commission. 
This  approval  could  be  given  without  formal  hearing,  but 
in  such  case  no  subsequent  proceeding  was  to  be  affected 
by  the  approval.1  The  significance  of  the  limiting  date, 
January  i,  1920,  was  that  a  joint  committee  of  the  two 
Houses  was  sitting  on  railroad  affairs,  and  it  was  thought 
that  it  could  by  that  time  work  out  a  permanent  plan. 

This  provision  might  have  resulted  in  a  significant 
alteration  in  procedure,  with  the  result  of  reducing  the 
number  of  necessary  suspensions,  and  furnishing  a  method 
more  satisfactory  to  both  shipper  and  carrier.  But  within 
a  few  months  the  roads  were  taken  over  by  the  federal 
government.  The  Director- General  was  under  no  obliga- 
tion to  respect  a  provision  that  required  permission  from 
the  Commission  to  file  increased  rates.  He  not  only  dis- 
regarded it,  but  ordered  all  "i5th  Section  applications" 
for  the  filing  of  increased  rates  withdrawn.  No  appli- 
cations of  this  kind  were  filed  during  federal  control  ex- 
cept by  the  few  unimportant  carriers  not  taken  over  by 
the  Government.  When  the  roads  emerged  from  Gov- 
ernment control,  the  expiration  date  of  this  amendment, 
January  i,  1920,  had  been  reached,  and  carriers  were  now 
subject  to  another  procedure  under  the  Transportation 
Act  of  1920. 

With  1910  begins  that  co-operation  in  the  handling  of 
1 40  Stat.  L.t  272. 


14  RAILROADS  AND  GOVERNMENT 

rate  matters  before  the  Commission  involving  the  car- 
riers of  widely  extended  territories,  which  has  been  so 
characteristic  of  the  last  decade.  There  are  many  rea- 
sons for  this  abandonment  of  individual  action.  Inter- 
corporate relationships  had  become  more  intimate  and 
comprehensive.  The  carriers  were  becoming  more  accus- 
tomed to  working  together.  An  organization  had  been 
perfected  in  1906  to  oppose  the  Hepburn  amendments  to 
the  Interstate  Commerce  Act,  and  while  the  extravagance 
of  its  propagandism  brought  this  organization  into  dis- 
repute, and  reacted  unfavorably  upon  the  cause  of  the 
railroads,  yet  the  carriers  gained  some  experience  in  co- 
operating with  one  another.  In  1910  a  national  statis- 
tical organization,  the  Bureau  of  Railway  Economics,  was 
set  up  to  present  the  facts  of  the  railroad  situation  to  the 
public  uncolored  by  the  personal  bias  of  any  individual 
carrier.  The  railroads  felt  that  their  situation  was  be- 
coming critical,  and  that  a  non-partisan  presentation  of 
their  situation  to  the  public  would  win  support.  More- 
over, they  wished  to  have  an  agency  available  to  prepare 
statistical  material  for  presentation  to  the  Commission 
on  a  uniform  basis,  freed  from  the  confusion  that  would 
arise  from  a  mass  of  data  furnished  by  individual  roads 
without  any  centralized  guidance. 

Again,  there  were  reasons  in  the  nature  of  the  problem 
why  roads  should  associate  together  for  their  cases.  The 
relation  between  rates  and  investment  was  becoming,  as 
the  roads  saw  it,  a  serious  question,  and  only  by  a  presen- 
tation covering  an  entire  territory  could  they  properly 
impress  the  Commission  with  its  significance.  More- 
over, the  legislation  of  1910  had  a  very  direct  influence. 
The  power  of  the  Commission  to  suspend  rates  pending 
a  hearing  and  to  enter  upon  an  investigation,  threw  the 
carriers  upon  the  defensive.  The  requirement  that  the 
increased  rates  must  be  justified  necessitated  the  accumu- 
lation of  elaborate  data  covering  capitalization,  equip- 


RATE  REGULATION  15 

ment,  labor  conditions,  costs  of  materials,  physical  factors 
of  operation — all  of  which  needed  to  be  developed  on  a 
territorial  scale  to  make  their  presentation  effective.  It 
is  more  than  likely  that  the  enormous  mass  of  statistical 
data  poured  out  upon  the  Commission  was  in  part  a 
waste  of  effort,  but  the  roads  had  in  view  that  they  must 
"satisfy  the  mind  of  the  Commission,"  and  there  was  no 
way  of  foretelling  what  chance  statistical  fact  might 
turn  the  trick. 

Two  elaborate  investigations  covering  proposed  in- 
creases in  rates  were  conducted  by  the  Commission  in 
1910,  one  in  Eastern  and  one  in  Western  territory,1  in 
which  the  records  were  stupendous.  The  plea  of  the 
railroads  was  that  they  were  not  earning  a  fair  return 
upon  the  value  of  their  property,  due  to  the  increased  cost 
of  operation,  principally  increased  labor  cost.  In  neither 
of  these  cases  did  the  railroads  succeed  in  satisfying  the 
Commission  that  increases  were  necessary.  The  Com- 
mission held  that  operating  revenues  were  increasing 
sufficiently  to  absorb  the  increase  in  expenses,  and  that 
efficient  management  would  take  care  of  the  situation 
without  additions  to  the  rates.  In  view  of  the  present 
responsibility  of  the  Commission  to  furnish  adequate 
transportation  service  as  required  by  the  Act  of  1920, 
it  is  of  interest  to  record  the  attitude  of  the  Commission 
ten  years  earlier. 

"  We  must  not  regard  too  seriously,  however,  the  effort 
of  railroad  counsel  to  establish  this  Commission  in  loco 
parentis  toward  the  railroads.  .  .  .  This  country  can- 
not afford  to  have  poor  railroads,  insufficiently  equipped, 
unsubstantially  built,  carelessly  operated.  .  .  .  Never- 
theless, it  is  likewise  to  be  remembered  that  the  Govern- 
ment has  not  undertaken  to  become  the  directing  mind 
in  railroad  management.  We  are  not  the  managers  of 
1 20  I.  c.  C.,  243,  307. 


1 6  RAILROADS  AND  GOVERNMENT 

the  railroads.  And  no  matter  what  the  revenue  they 
may  receive,  there  can  be  no  control  placed  by  us  upon 
its  expenditure,  no  improvements  directed,  no  economies 
enforced." 1 

But  the  most  significant  rate  case  of  the  period  was  the 
so-called  "Five  Per  Cent  Case"  of  1914.*  This  contro- 
versy attracted  wide  public  notice  and  contained  much 
that  was  prophetic  of  future  development.  The  Com- 
mission in  its  original  decision  in  July,  1914,  granted  in- 
creases in  central  freight  association  territory,  but  de- 
nied general  increases  throughout  official  classification 
territory.  It  conceded  that  upon  the  record  the  net 
operating  income  of  the  carriers  was  smaller  than  was 
demanded  in  the  public  interest,  amounting  in  1913  to 
5.36  per  cent  upon  the  property  investment3  of  thirty- 
five  railroad  systems  in  this  territory,  but  it  held  that 
this  income  could  be  materially  augmented  by  the  intro- 
duction of  economies  and  the  abandonment  of  wasteful 
and  unremunerative  services.  In  this  position  it  was  in 
accord  with  the  arguments  of  Mr.  Brandeis,  one  of  the 
attorneys  in  the  case  for  the  public,  who  had  acquired 
considerable  publicity  in  1910  in  connection  with  his 
advocacy  of  the  introduction  of  scientific  management 
into  railroad  operation,  and  who  had  estimated  a  saving 
to  the  roads  thereby  of  a  million  dollars  a  day. 

But  the  outbreak  of  the  war,  with  its  upset  of  normal 
industrial  relations,  made  immediate  relief  necessary  for 
the  carriers.  They  could  not  wait  upon  the  leisurely 
working  of  the  suggested  reforms.  Upon  rehearing,  the 
Commission  in  October  granted,  with  certain  exceptions, 

J2o  I.  C.  C.,  317. 

2  31  I.  C.  C.,  351.     Rehearing,  32  I.  C.  C.,  325. 

3  Property  investment  means  here  the  book  account,  "cost  of  road 
and  equipment,"  which  has  steadily  improved  in  accuracy  since  the 
introduction  of  accounting  regulations,  July  I,  1907. 


RATE  REGULATION  17 

a  horizontal  increase  of  5  per  cent.  It  was  in  this  case 
that  for  the  first  time  a  sharp  division  of  opinion  appeared 
in  the  Commission  concerning  the  responsibility  of  that 
body  for  the  financial  condition  of  the  carriers.  One 
view  was  that  the  Commission's  authority  was  to  be 
narrowly  interpreted,  and  that  it  must  confine  itself  to 
determining  whether  the  proposed  increased  rates  were 
in  themselves  reasonable.  The  other  view  looked  be- 
yond the  mere  rate  to  the  effect  of  earnings  upon  service 
to  the  public,  and  inquired  whether  the  wage  that  the 
railroad  was  getting  from  the  public  was  a  "living  wage."  ^  Y '*" 
This  latter  point  of  view,  appearing  sharply  for  the  first 
time,  is  prophetic  of  the  new  attitude  to  be  assumed 
toward  the  railroad  industry  after  the  war  as  embodied 
in  the  Transportation  Act  of  1920. 

As  early  as  1911  Commissioner  Prouty  in  the  Eastern 
Advance  Rate  Case  said* 

"We  have  no  authority,  as  such,  to  say  what  amount 
these  carriers  shall  earn,  nor  to  establish  a  schedule  of 
rates  which  will  permit  them  to  earn  that  amount.  Our 
authority  is  limited  to  inquiring  into  the  reasonableness 
of  a  particular  rate  or  rates  and  establishing  that  rate  or 
practice  which  is  found  lawful,  in  place  of  the  one  con- 
demned as  unlawful."  But  he  added:  "While  the  au- 
thority of  this  Commission  only  extends  to  the  passing 
upon  the  reasonableness  of  the  rate  presented  for  its 
consideration,  it  is  not  confined  to  single  rates.  Any 
number  of  rates  may  be  embraced  in  the  same  complaint, 
and  the  duty  of  the  Commission  is  to  consider  and  pass 
upon  all  those  so  presented.  When,  as  here,  there  is 
involved  the  propriety  of  advances  which  affect  the 
entire  rate  fabric  within  this  territory,  embracing  one- 
half  the  tonnage  and  one-half  the  freight  revenues  of 
this  whole  country,  and  when  that  advance  is  justified 
mainly  upon  the  ground,  not  of  commercial  conditions, 


1 8  RAILROADS  AND  GOVERNMENT 

but  by  lack  of  adequate  revenue  upon  the  present  rate 
basis,  this  Commission  must  determine  the  fundamental 
question." 

In  the  Five  Per  Cent  Case  of  1914  Commissioner 
Clements,  in  maintaining  the  strict  construction  attitude, 
said:  "In  my  view  the  foregoing  report  and  decision 
constitute  a  new  and  radical  departure  and  a  most  seri- 
ous and  portentous  step,  in  that  by  this  step  the  Com- 
mission is  shown  to  deem  itself  justified  in  sanctioning 
these  increased  rates  .  .  .  upon  consideration  of  general 
financial  and  operating  results,  without  resorting  to  other 
ordinary  tests  or  factors  heretofore  deemed  pertinent 
and  necessary  to  the  determination  of  the  reasonable- 
ness of  rates.  I  am  not  aware  of  any  prior  case  in  which 
this  Commission  or  any  court  has  held  that  the  need  by 
a  carrier  of  money  was  of  itself  proof  of  the  reasonable- 
ness of  a  specific  rate,  or  body  of  rates,  increased  to  meet 
such  need." 

On  the  other  side  in  the  same  case  may  be  quoted 
Commissioner  Daniels:  "A  living  wage  is  as  necessary  for 
a  railroad  as  for  an  individual.  A  carrier  without  a  suffi- 
cient return  to  cover  costs  and  obtain  in  addition  a 
margin  of  profit  large  enough  to  attract  new  capital  for 
extensions  and  improvements  cannot  permanently  ren- 
der service  commensurate  with  the  needs  of  the  pub- 
lic." 

Again  in  the  Western  Rate  Advance  Case  of  1915,  in 
•i  i  which  the  Commission  denied  many  increases,  and 
granted  advances  in  the  case  only  of  a  few  commodities 
and  in  passenger  fares,  because  it  was  not  convinced  of 
the  general  inadequacy  of  the  carriers'  revenues,  Com- 
missioner Daniels  dissented  in  an  opinion  which  clearly 
defines  the  issue  between  broad  and  narrow  construction 
of  the  Commission's  powers.1 

135!- C.C.,  654,679. 


KATE  REGULATION  ig 

"While  it  is  nowhere  explicitly  stated  in  the  majority 
report,  I  am  unable  to  escape  the  conviction  that  the 
reluctance  to  find  that  increased  rates  have  been  more 
generally  justified  is  largely  rooted  in  an  unwillingness 
to  find  that  the  revenues  of  the  carriers  as  a  whole  are 
smaller  than  is  demanded  in  the  public  interest,  and  also 
in  the  belief  that  the  financial  exigencies  of  many  of  the 
carriers  are  traceable  to  financial  maladministration,  and 
that  if  due  economy  and  integrity  had  been  uniformly 
observed  the  difficulty  over  the  attested  decline  in  reve- 
nues would  have  been  readily  surmounted. 

"Among  the  particular  carriers  involved  in  this  pro- 
ceeding the  Rock  Island  and  Frisco  have  recently  at- 
tained unenviable  notoriety  by  reason  of  financial  mis- 
management and  other  roads  parties  hereto,  such  as  the 
Alton,  have  in  the  past  been  wrecked  or  plundered. 
There  can  be  no  question  of  these  facts.  There  can  be 
nothing  said  in  extenuation  or  mitigation  of  them.  And 
it  has  therefore  resulted  that  a  wide-spread  disbelief  exists 
in  the  general  integrity  of  railroad  management  and  that 
a  skeptical  attitude  has  been  assumed  by  many  toward 
the  plea  advanced  that  railroad  earnings  are  inadequate 
and  that  increased  rates  are  warranted. 

"It  would  nevertheless  appear  that,  while  the  severest 
condemnation  of  these  practices  should  suffer  no  particle 
of  abatement,  the  time  had  at  last  come  to  take  a  dis- 
criminating view  of  the  effect  of  refusing  rate  increases 
otherwise  just  and  reasonable  because  of  a  wide-spread 
resentment  at  evils  perpetrated  in  the  past  by  dishonest 
or  designing  railroad  officers  or  their  allied  financiers. 
Such  a  policy  visits  in  large  measure  the  same  penalty 
upon  the  proprietors  of  a  railway  conducted  with  integrity 
and  honesty  as  upon  the  luckless  shareholders  of  a  looted 
road.  In  either  case  those  who  suffer  from  its  effects  are 
not  those  who  have  profited  by  the  wrongs  perpetrated 
in  the  past.  It  is  therefore  suggested  that  the  appro- 


20  RAILROADS  AND   GOVERNMENT 

priate  remedy  is  the  prosecution  and  punishment  of  the 
individual  offenders,  not  the  continued  withholding  of 
adequate  rates  to  the  carriers  as  a  whole.  .  .  . 

"I  am  individually  of  opinion  that  our  duty  in  the 
present  case  requires  us  in  frankness  to  make  a  finding 
upon  the  general  issue  of  the  alleged  inadequacy  of  the 
revenues  of  the  carriers  collectively.  The  carriers,  the 
protestants,  and  the  country  are  entitled  to  know  the 
conclusion  of  the  Commission  upon  this  point,  and  not 
to  be  left  with  a  confusing  mass  of  detailed  evidence  and 
isolated  conclusions  upon  single  matters  involved  therein. 
The  three  previous  general  rate  advance  cases  have 
unquestionably  held  that  the  Commission  may  make  a 
finding  upon  this  general  question  and  may  employ  such 
a  finding  to  determine,  in  connection  with  other  relevant 
testimony,  the  justice  and  propriety  of  permitting  par- 
ticular increased  rates  to  become  effective.  In  the 
present  case  the  general  issue  is  simply  not  met,  and  in 
passing  upon  particular  rates  proposed  to  be  increased  a 
novel  doctrine  is  for  the  first  time  invoked  to  disallow 
increased  rates  save  where  the  specific  evidence  relating 
thereto  makes  a  refusal  manifestly  impossible.  The 
failure  to  follow  established  premises  to  their  legitimate 
conclusion  only  beclouds  the  principles  upon  which  the 
Commission  may  be  expected  to  act  in  future  and  leaves 
nothing  certain  but  uncertainty. 

"In  the  matter  of  rate  regulation  and  fixation  we  have 
reached  a  point  where  one  of  two  courses  ought  delib- 
erately to  be  chosen  and  clearly  announced.  If,  despite 
increased  costs  not  offset  by  increased  revenue,  increases 
in  rates  are  to  be  denied,  except  where  in  individual 
instances  gross  injustice  would  be  occasioned  by  their 
denial,  the  carriers  ought  to  be  apprised  of  this  policy, 
so  that  they  may  set  their  house  in  order,  if  they  can, 
against  such  a  situation.  If,  on  the  other  hand,  we  are 
to  acknowledge  in  general,  what  we  are  perforce  com- 


RATE  REGULATION  21 

pelled  to  admit  in  detail,  just  and  reasonable  increased 
rates  should  be  permitted  not  grudgingly  but  with  such 
fair  measure  of  allowance  as  will  indicate  that  the  trans- 
portation industry  is  entitled  in  the  interest  of  the  public 
to  earnings  sufficient  to  provide  a  service  commensurate 
with  public  needs." 

The  prospective  entrance  of  this  country  into  the  war 
furnished  occasion  for  another  application  for  increased 
rates  amounting  to  15  per  cent  in  the  spring  of  1917, 
which  involved  the  carriers  in  all  three  territories.1  The 
Commission  found  no  country- wide  emergency  that  justi- 
fied a  general  increase.  It  did  find  that  the  conditions 
confronting  the  Eastern  carriers  were  more  serious,  and 
it  granted  increases  in  their  class  rates  while  denying 
them  to  the  other  two  territories.  The  Eastern  carriers 
succeeded  in  reopening  the  case  for  further  hearing  in 
November  and  obtained  an  order  in  March,  1918,  grant- 
ing additional  increases  on  specific  commodities  and  on 
joint  rates  into  other  territories.2 

These  increases  throughout  the  period  1911  to  1916 
were  secured  by  the  carriers  with  great  labor  and  toil, 
and  in  the  face  of  a  very  considerable  popular  opposition. 
It  was  difficult  for  a  public  that  had  always  been  accus- 
tomed to  falling  rates  and  that  had  established  a  Com- 
mission to  keep  rates  from  rising,  to  realize  that  a  time 
might  come  when  the  movement  would  be  in  the  other 
direction.  The  pioneer  period  in  which  the  railroad  had 
unused  capacity  and  in  which  it  was  actively  bidding  for 
business  to  fill  its  tracks  and  its  trains  was  passing  away. 
Population  had  grown  and  had  congested  the  territory  in 
many  sections.  Traffic  was  becoming  intensified.  What 
was  demanded  was  increased  capacity  of  existing  plant 
rather  than  extensions  into  new  country,  and  this  in- 

1  The  Fifteen  Per  Cent  Case.     45  I.  C.  C.f  303. 
1  Ex  parte  57. 


22  RAILROADS  AND  fiOVERNMENT 

creased  capacity  must  be  acquired  in  a  congested  area 
where  expansion  was  becoming  steadily  more  difficult 
and  costly.  Enlarged  terminals,  yard  tracks,  sidings, 
additional  main  tracks,  enlarged  platforms  and  ware- 
houses, heavier  equipment,  stronger  bridges,  better  bal- 
last, more  ties,  larger  and  more  ample  roundhouses, 
turntables,  machine-shops — and  not  merely  for  the  present 
but  for  a  reasonable  time  ahead,  these  were  the  expendi- 
tures calling  for  capital  in  enormous  amounts.  Coinci- 
dent therewith  was  the  steady  rise  in  prices  reflected  in 
the  cost  of  materials  purchased  and  in  wages  paid,  so  that 
operating  expenses  were  being  increased  at  the  time  when 
the  railroads  needed  to  make  a  favorable  showing  in  the 
investment  market  in  order  to  obtain  the  necessary  funds. 
A  study  of  the  figures  for  the  period  1908  to  1916  tells 
the  story.1  The  direction  of  physical  development  is 
shown  by  the  track-mileage  figures.  Yard  track  and 
siding  constructed  between  1908  and  1916  kept  pace  in 
actual  miles  with  the  increase  in  main-line  extensions  and 
nearly  equalled  the  increase  in  traffic  as  represented  by 
loaded  car  miles.  This  means  intensive  rather  than  ex- 
tensive growth.  While  efficiency  in  physical  handling  of 
traffic  was  increasing,  as  shown  by  the  steady  increase  in 
tons  per  train  and  per  car,  and  in  ton-miles  per  mile  of 
road,  yet  operating  expenses  per  ton-mile  showed  no 
tendency  to  decrease.  The  wages  paid  per  ton-mile 
remained  almost  unvarying.  Moreover,  although  gross 
revenue  steadily  increased,  there  was  a  marked  decline  in 
average  receipts  per  ton-mile,  from  0.754  cents  in  1908  to 
0.715  cents  in  1916.  .Investment  continued  steadily  to 
be  made,  the  total  amounting  to  $4,625,000,000  between 
1908  and  1916,  but  the  rate  of  return  in  the  face  of  much 
more  attractive  investments  in  other  fields  was  not  en- 
couraging. In  view  of  the  requirement  in  the  Act  of  1920 
that  the  Commission  shall  fix  rates  to  yield  6  per  cent 
1 1.  C.  C.  Annual  Rept.,  1918,  p.  79. 


RATE  REGULATION  23 

upon  property  valuation,  it  is  interesting  to  observe  that 
according  to  the  Commission's  calculations  the  percent- 
age relation  of  railroad  operating  income  to  investment 
never  reached  6  per  cent  during  the  period  1908  to  1916 
(June  30),  and  only  reached  6.17  per  cent  in  the  calendar 
year  1916.  The  actual  figures  are  as  follows: 

PERCENTAGE  RELATION  RAILWAY  OPERATING  INCOME 

TO  PROPERTY  INVESTMENT 

(All  railways  except  switching  and  terminal  companies) 

Year  ending  June  30,  1908 4.89  per  cent 

1909 5-38         " 

1910 5.68 

1911 4.92 

1912 4.69 

"         "  "        1913 5-01         " 

"        1914 4.12         " 

'        1915 4-18 

1916 5.90 

"      Dec.   31,  1916 6.17 

In  the  Five  Per  Cent  Case  in  1914  the  Commission 
found  that  for  the  thirty-five  railroad  systems  in  Official 
Classification  territory,  the  ratio  of  net  operating  income 
to  property  investment  for  the  years  1900  to  1913  ranged 
from  6.31  per  cent  in  1906  to  5.19  per  cent  in  1912,  and 
that  the  average  for  the  period  was  5.64  per  cent.  It 
discovered  a  tendency  toward  diminishing  net  operating 
income  and  held  that  the  rate  of  return  as  a  whole  was 
"smaller  than  is  demanded  in  the  interest  of  both  the 
general  public  and  the  railroads."  Moreover,  the  aggre- 
gate amount  paid  in  dividends  fell  off  $100,000,000  from 
the  high  year  of  this  period  (1911),  and  the  average  rate 
on  dividend-paying  stock  which  was  8.07  per  cent  in  1908 
was  6.75  per  cent  in  1916. 

Whatever  may  be  one's  personal  view  as  to  whether 
this  was  or  was  not  a  satisfactory  financial  showing  for  our 


24  RAILROADS   AND   GOVERNMENT 

railroad  system,  the  fact  remained  that  it  did  not  satisfy 
the  investor.  Consequently,  the  sound  policy  long  prac- 
tised by  railroad  management  of  keeping  ahead  of  traffic 
by  providing  the  necessary  facilities  for  handling  it  was 
gradually  weakened,  and  at  the  time  the  country  entered 
the  war  the  railroad  system  was  far  short  of  that  standard 
of  efficiency  which  the  demands  of  traffic  required.  War 
exigencies  perforce  aggravated  this  situation,  and  when 
the  roads  were  returned  in  1920,  their  condition  of  under- 
main  tenance  was  a  factor  of  grave  public  concern. 

Railroad  critics  have  laid  this  unfortunate  condition 
at  the  door  of  the  Commission,  and  have  insisted  that 
the  niggardliness  and  short-sightedness  of  this  body  is 
responsible  for  the  financial  condition  of  the  roads.  But 
this  explanation  of  the  railroad  situation  is  far  too  simple. 
It  has  the  advantage  of  being  able  to  lay  the  blame  on 
some  specific  and  tangible  object,  but  it  does  not  reach 
the  heart  of  the  difficulty.  The  Commission's  power 
was  limited  to  granting  increases  upon  a  demonstration 
of  their  reasonableness.  Railroad  income  accounts  did 
not  always  make  clear  the  exigency,  and  it  could  only  be 
a  matter  of  judgment  as  to  what  the  future  would  bring 
forth.  The  fact  that  earnings  fell  off  sharply  in  some 
instances  after  the  Commission  had  refused  increases 
demonstrated  only  that  it  was  not  an  infallible  prophet. 
Railroad  credit  declined  in  the  half-dozen  years  before  the 
war,  not  primarily  because  of  the  specific  decisions  of  the 
Commission,  but  rather  because  the  Commission  had 
power  to  decide  at  all.  The  long-continued  period  of  de- 
clining rates  was  at  an  end.  Increases  were  bound  to  be 
sought.  Whether  rates  would  or  would  not  be  increased 
was  now  beyond  the  voluntary  determination  of  the  car- 
riers themselves.  The  investing  public  for  the  first  time 
was  brought  to  a  sharp  realization  of  the  fact  that  the 
earning  power  of  the  roads  was  subject  to  public  con- 
trol. Decline  in  credit  was  due  to  the  uncertainty  as  to 


RATE   REGULATION  25 

what  regulating  authorities,  state  and  federal,  would  do 
when  requests  for  rate  increases  were  brought  before 
them.  There  is  little  doubt  also  that  the  revelations  of 
financial  mismanagement  of  certain  railroad  properties 
during  the  period  had  their  influence  in  increasing  the 
timidity  of  investors. 

Any  attempt  to  summarize  completely  the  rate  de- 
cisions of  this  period  would  widely  extend  this  discussion, 
and  would  develop  few  principles  or  traffic  situations  not 
analyzed  in  the  treatises  covering  the  Commission's  his- 
tory before  1910.  The  long  and  short  haul  problem  has 
been  deemed  of  sufficient  importance  to  warrant  separate 
and  elaborate  analysis.  Other  types  of  cases  are  referred 
to  in  their  proper  context.  Beyond  this,  a  few  cases  may 
be  mentioned  that  portray  interesting  features. 

A  case  which  has  much  significance  from  the  stand- 
point of  the  future  development  of  traffic  handling  is 
that  which  settled  the  legal  position  of  the  freight  for- 
warder, the  agency  that  solicits  less-than-car-load  ship- 
ments to  be  combined  and  forwarded  as  car-loads.  The 
freight  is  delivered  to  the  railroad  by  the  forwarder  and 
is  accepted  at  destination  by  the  forwarder's  agent,  who 
acts  as  consignee  and  who  pays  the  freight  charges  at 
car-load  rates.  The  carriers  attempted  to  put  a  stop  to 
this  business  by  a  rule  providing  that  the  car-load  rate 
could  only  be  applied  when  all  the  merchandise  in  the  car 
was  owned  by  a  single  individual.  The  Commission  held 
that  the  railroad  could  not  look  beyond  the  physical  inci- 
dents of  the  transportation  to  the  ownership  of  the  goods 
and  sustained  the  position  of  the  forwarders.  This 
opinion  was  upheld  by  the  Supreme  Court.1  It  was  the 
same  question  that  had  been  fought  out  through  a  long 
series  of  suits  between  forwarders  and  railways  in  England, 
and  the  courts  had  finally  reached  the  same  result  as 
»22o  U.  S.,  235  (1911);  14  I.  C.  C,  422,  437  (1908). 


26  RAILROADS  AND   GOVERNMENT 

was  reached  here.  So  far  as  law  could  accomplish  it, 
the  forwarding  business  was  thereby  given  a  permanent 
place  in  our  industrial  system. 

The  New  York  Harbor  Case  in  191 71  raised  once  more 
the  perennial  question  of  the  relative  rights  of  the  various 
terminal  points  on  New  York  harbor.  Terminals  in  the 
state  of  New  Jersey  insisted  that  they  were  entitled  to 
lower  rates  than  Manhattan  and  Brooklyn  because  they 
were  not  subject  to  the  terminal  expense  involved  in 
lighterage.  The  Commission  admitted  that  it  might  have 
been  better  had  the  development  of  the  rate  fabric  recog- 
nized the  relative  advantages  of  location  and  the  relative 
expense  of  terminal  service  on  the  two  sides  of  the  har- 
bor, and  had  adjusted  the  rates  accordingly.  A  more 
enduring  rate  structure  would  then  have  been  created. 
But  competitors  had  brought  rates  generally  to  a  com- 
mon level.  There  was  no  undue  discrimination  in  the 
existing  system,  and  the  benefit  to  be  derived  from  dis- 
turbing it  could  not  compensate  for  the  violence  that 
would  be  done  to  the  industrial  interests  involved.  In 
this  conclusion  the  Commission  contributed  materially 
to  the  movement  for  the  unification  of  the  port,  which  has 
long  been  needed  and  would  ere  this  have  been  realized 
but  for  the  interference  of  political  interests.2 

Two  cases  before  the  Supreme  Court  developed  con- 
clusions of  significance  to  the  practice  of  rate  making  and 
defined  more  clearly  the  limits  to  the  power  of  public 
regulation.  In  the  North  Dakota  Coal  Case,3  the  maxi- 
mum car-load  rates  on  coal  established  by  the  state  were 
declared  unconstitutional.  It  was  conceded  that  the  state 
had  a  broad  field  for  the  exercise  of  its  discretion  in  pre- 
scribing reasonable  rates,  and  that  carriers  were  not  en- 

147  I.  C.  C.,  643. 

1  This  opinion  is  one  of  the  most  complete  discussions  available  of 
the  transportation  and  traffic  situation  in  New  York  harbor. 
» 236  U.S.,  585  (1915). 


RATE  REGULATION  27 

titled  to  the  same  percentage  of  profit  on  every  sort  of 
business.  Reasonable  classification  of  commodities  to 
be  subject  to  different  rates  was  allowable.  But  a  carrier 
was  entitled  to  a  reasonable  reward  for  the  carriage  of 
freight,  and  the  state  could  not  justify  on  the  ground  of 
public  interest  the  selection  of  a  commodity  for  trans- 
portation at  less  than  cost  or  at  merely  a  nominal  com- 
pensation. The  same  principle  was  enunciated  in  the 
Norfolk  and  Western  Passenger  Case,1  decided  on  the 
same  day,  involving  a  state  two-cent  passenger  law,  in 
which  it  was  held  that  as  the  passenger  business  was  one 
of  the  main  departments  of  the  railroad,  the  validity  of 
the  law  was  to  be  determined  by  its  effect  upon  this  class 
of  business  considered  separately.  The  principle  here 
laid  down  is  fairly  clear.  While  classification  of  goods 
with  varying  rates  is  permissible,  and  while  presumably 
certain  commodities  might  be  carried  even  at  less  than 
cost  provided  the  amount  of  traffic  involved  does  not 
materially  affect  the  net  revenue,  nevertheless  when  the 
traffic  is  considerable  and  the  earnings  are  of  importance, 
the  public  authority  must  prescribe  rates  that  are  com- 
pensating. As  Justice  Hughes  said:  "The  state  does  not 
enjoy  the  freedom  of  an  owner."  What  might  be  done 
as  a  matter  of  public  policy  under  Government  ownership 
and  operation  is  not  justifiable  when  private  capital  has 
embarked  under  a  contract  which  insures  it  a  reasonable 
return  and  protection  against  exploitation. 

i236U.  S.,  605  (1915). 


CHAPTER  III 

THE  LONG  AND  SHORT  HAUL 

SECTION  4  of  the  Interstate  Commerce  Act,  which 
was  intended  to  put  an  end  to  discrimination  between 
places,  the  so-called  long  and  short  haul  clause,  has  had 
a  stormy  career.  In  its  original  form  it  provided  that 
\Wit~  should  be  unlawful  for  a  carrier  to  charge  under  sub- 
stantially  similar  circumstances  and  conditions  a  greater 
compensation  for  a  shorter  than  a  longer  distance  over 
the  same  line  in  the  same  direction,  the  shorter  being 
included  within  the  longer  distance,  but  the  Commis- 
sion was  authorized  to  grant  exemption  from  the  prohibi- 
tion, and  to  determine  the  extent  of  the  departure  there- 
from. The  clause  was  intended  to  destroy  the  practice 
under  which  the  roads  competed  at  certain  points  and 
recouped  themselves  by  charging  higher  rates  on  non- 
competitive  short-haul  business.  The  Commission's  in- 
terpretation of  this  clause  was  called  forth  at  the  very 
beginning  of  its  career  in  the  Louisville  and  Nashville 
Case,  and  with  slight  modification  the  position  then  taken 
was  maintained  without  change  thereafter.  It  recog- 
nized that  there  were  cases  in  which  conditions  at  the 
longer-distance  point  were  sufficiently  dissimilar  to  war- 
rant suspension  of  the  section,  but  these  conditions  in 
t  the  main  arose  out  of  competition  in  which  one  of  the 
I  competitors  was  beyond  the  jurisdiction  of  the  regu- 
lating authority — competition  of  water  carriers  or  of 
Canadian  railroads. 

The  section  lost  its  effectiveness  in  1897  by  a  ruling 
of  the  Supreme  Court  in  the  Alabama  Midland  Case.1 
However  vague  this  opinion  may  seem  to  be  when  taken 

1 168  U.  S.,  144. 
28 


THE  LONG  AND  SHORT  HAUL  29 

by  itself,  its  reiteration  in  succeeding  cases1  leaves  no 
doubt  as  to  the  position  of  the  court.  Competition  that 
is  controlling  in  traffic  and  rates  produces  in  and  of  it- 
self that  dissimilarity  of  circumstances  and  conditions 
which  the  statute  had  in  mind,  and  when  this  condition 
exists  a  carrier  has  a  right  of  its  own  motion  to  take 
the  situation  into  account  in  fixing  the  competitive  rate. 
In  other  words,  in  the  only  instance 
would  have  any  desire  to  violate  the 
when  it  was  compelled  to  meet  the 
other  carrier,  the  prohibition  against  place  discrimination 
was  automatically  removed,  because  the  court  decided 
that  the  conditions  at  competitive  and  non-competitive 
points  were  under  these  circumstances  substantially  dis- 
similar. Moreover,  conditions  being  dissimilar,  no  ad- 
vance permission  of  the  Commission  was  necessary  to  take 
advantage  of  such  dissimilarity.  No  ruling  could  have 
been  better  calculated  to  knock  the  props  from  under  the 
Commission's  authority.  Thereafter  the  Commission 
could  only  make  suggestions  for  adjustments  to  eliminate 
place  discriminations  of  this  character,  and  whether  such 
suggestions  were  or  were  not  adopted  depended  upon 
whether  they  appealed  to  the  carriers  as  in  their  interest. 

No  amendment  of  this  section  took  place  in  1906  when 
the  law  was  first  thoroughly  overhauled.  Attention  was 
primarily  centred  upon  giving  the  Commission  rate-mak- 
ing authority.  The  long  and  short  haul  question  was  a 
technical  one,  not  generally  understood  by  the  public. 
The  opposition  of  the  railroads  and  the  Eastern  jobbing 
interests  seeking  to  preserve  their  hold  on  Southern 
markets  played  a  part  in  postponing  action.  By  1910 
the  Rocky  Mountain  congressmen  had  become  alive  to 
the  serious  discrimination  against  their  section  of  the 
country,  due  to  the  exaggerated  use  of  the  low  rate  for 
the  long  haul  to  the  Pacific  coast.  They  succeeded  in 

1 175  U.  S.,  648  (1900);  181  U.  S.,  i  (1901);  190  U.  S.,  273  (1903). 


30  RAILROADS  AND  GOVERNMENT 

that  year  in  eliminating  from  Section  4  the  trouble- 
making  clause,  "under  substantially  similar  circumstances 
and  conditions."  With  this  gone,  the  section  absolutely 
forbade  lower  charges  to  longer-distance  points  except 
after  hearing  and  approval  by  the  Interstate  Commerce 
Commission.  At  the  same  time,  two  important  addi- 
tions were  made  to  the  section.  One  prohibited  a  greater 
compensation  for  a  through  haul  than  the  aggregate  of 
the  intermediate  rates.  The  other  aimed  to  destroy  a 
pernicious  type  of  competition  practised  by  railroads 
against  waterways.  It  provided  that  whenever  a  rail- 
road reduced  its  freight  rates  at  competitive  points  in 
competition  with  a  water  route,  it  could  not  again  in- 
crease them  unless  the  Commission  decided  after  hearing 
'  that  the  reasons  for  the  increase  rested  on  altered  condi- 
tions that  were  other  than  the  elimination  of  water  com- 
petition. Railroads  were  no  longer  to  be  permitted  to 
drive  steamboats  off  the  rivers  by  offering  unremunera- 
tive  rates,  and  then  recoup  themselves  at  their  leisure 
after  the  disappearance  of  their  rivals.  This  provision 
was  borrowed  from  the  constitution  of  the  state  of  Cali- 
fornia. It  was  introduced  by  Senator  Burton,  the  chair- 
man of  the  National  Waterways  Commission,  which  had 
recommended  the  provision  in  its  report  to  Congress.1 

On  its  face  Section  4  now  gave  the  Commission  arbi- 
trary and  sweeping  powers.  But  that  body  realized  that 
such  was  not  the  legislative  intent  and  that  any  attempt 
to  act  beyond  what  was  its  reasonable  authority  would 
be  quickly  blocked.  That  its  interpretation  of  its  powers 
was  uniformly  upheld  by  the  highest  court  in  spite  of 
strenuous  corporate  opposition,  and  temporary  obstruc- 
tion by  the  Commerce  Court,  was  due  to  the  sanity  and 
sound  reasonableness  with  which  it  interpreted  its  pow- 

1  For  evidence  of  the  manner  in  which  railroads  destroyed  water 
lines,  read  the  investigations  by  the  Commission  of  the  practices  of  the 
Louisville  and  Nashville.  24  I.  C.  C.,  228;  31  I.  C.  C.,  281,  301. 


THE  LONG  AND  SHORT  HAUL  31 

era.  It  proceeded  forthwith,  as  soon  as  the  amended 
section  was  operative,  to  lay  down  rules  of  procedure 
within  which  its  action  was  to  be  circumscribed.  The 
most  extensive  departures  from  the  distance  principle 
prevailed  in  the  Southeast  and  in  trans-continental  traffic. 
It  is  not  surprising  that  most  of  the  leading  cases  in  the 
early  years  relating  to  this  problem  have  been  Southern 
railroad  cases.  Coastwise  competition,  a  potential  or 
what  might  better  be  called  a  plausible  competition  by 
numerous  rivers  for  a  distance  into  the  interior,  the 
struggle  for  Southern  markets  between  industries  in  the 
East  and  the  Middle  West,  all  these  factors  brought  an 
irresistible  pressure  to  bear  to  secure  competitive  rates  at 
the  distant  point  which  were  lower  than  those  charged 
to  way  stations.  This  system  had  become  so  ingrained 
that  any  violent  or  sudden  change  would  have  been  indus- 
trially disastrous.  Accordingly,  the  Commission  sought 
for  a  working  rule  that  would  remove  the  unreasonable 
discriminations  and  at  the  same  time  preserve  what  was 
justifiable  in  the  existing  situation.  Applications  for  relief 
poured  in  by  the  thousands  and  from  action  upon  these 
there  evolved  a  code  which  later  in  1920  was  crystallized 
into  statutory  form. 

In  the  matter  of  passenger  applications  the  principle 
involved  was  somewhat  different  from  that  of  freight, 
because  passenger  fares  are  usually  constructed  on  the 
mileage  basis,  and  freight  rates  are  not,  and  because  the 
passenger  being  his  own  unloader,  can,  if  there  is  a  suffi- 
ciently wide  discrepancy  to  warrant  it,  buy  his  ticket  to 
the  more  distant  point  at  the  cheaper  rate,  and  unload 
himself  at  the  intermediate  point.  The  Commission  laid 
down  the  rule  that  if  a  circuitous  line  exceeded  the  direct 
line  by  at  least  15  per  cent  or  by  at  least  six  miles,  the 
longer  route  could  meet  the  passenger  rate  of  the  direct 
line  without  reference  to  its  intermediate  fares.  Of  wider 
interest  throughout  the  country  was  the  clause  providing 


32  RAILROADS   AND  GOVERNMENT 

that  the  through  rate  should  not  be  greater  than  the  aggre- 
gate of  the  intermediate  rates  subject  to  the  act.  The 
two-cent  passenger  laws  in  many  states  with  which  the 
railroads  had  been  obliged  to  comply  created  the  issue, 
and  carriers  had  appealed  for  relief.  The  Commission 
felt  that  the  final  solution  to  be  arrived  at  was  that  state 
and  interstate  passenger  fares  should  be  on  the  same 
basis,  but,  pending  the  outcome  of  litigation  on  state 
rates,  it  permitted  the  maintenance  of  the  higher  inter- 
state charges. 

In  applications  for  relief  in  freight  service,  very  largely 
from  Southern  carriers,  the  Commission  laid  down  the 
rule  that  circuitous  lines  would  be  permitted  to  lower 
their  rates  to  their  termini  in  competition  with  the  direct 
route  and  at  the  expense  of  intermediate  points,  only 
when  the  long  line  was  manifestly  circuitous,  when  the 
short  line  had  observed  the  distance  principle  at  inter- 
mediate points,  and  when  the  intermediate  rates  on  the 
long  line  were  apparently  reasonable  and  not  subject  to 
attack.  It  is  obvious  that  if  the  short  line  were  per- 
mitted to  violate  the  distance  principle,  there  would  be 
created  exactly  the  type  of  railroad  competition  which 
the  Commission  had  at  the  beginning  of  its  history  tried 
to  prevent,  which  the  courts  had  sanctioned  in  the  Ala- 
bama Midland  Case,  and  which  presumably  had  been 
ended  by  the  amendment  of  1910. 

From  New  York  and  New  England  to  South  Atlantic 
and  Gulf  ports,  water  competition  was  influential  and 
necessitated  the  granting  of  relief  to  rail  carriers  from  the 
effect  of  the  4th  Section.  From  Ohio  River  crossings 
and  from  St.  Louis  to  New  Orleans  and  other  Mississippi 
River  crossings,  competition  was  largely  imaginary  and 
had  been  so  for  many  years.  Not  since  1890  had  there 
been  a  through  boat  service  between  St.  Louis  and  New 
Orleans  except  at  rare  intervals.  In  I9I41  the  Com- 
'30  I.  C.  C.,  153. 


THE  LONG  AND  SHORT  HAUL  33 

mission,  while  granting  lower  rates  to  river  points,  recog- 
nized that  water  competition  was  rapidly  dwindling.  In 
19 1 71  it  refused  to  grant  lower  rates  between  New  Orleans 
and  Kansas  City  than  to  intermediate  points,  because 
since  1900  rates  had  been  under  rail  control.  In  general 
the  policy  of  the  Commission  at  this  time,  so  far  as  water 
competition  was  concerned,  was  to  grant  relief  when  it 
was  satisfied  that,  although  the  competitive  rates  were 
subnormal,  they  yielded  some  profit  above  the  actual 
cost  of  handling,  and  hence  did  not  burden  the  inter- 
mediate business,  and  when  the  intermediate  rates  were  F  ir 
not  in  themselves  unreasonable.2 

But  the  South  was  dotted  with  so-called  "basing- 
points,"  wholesale  points  served  by  more  than  one  rail- 
road where  no  water  transportation  was  present,  but  en- 
joying rates  that  put  them  on  an  equality  with  water 
competitive  points.  These  adjustments  were  disap- 
proved by  the  Commission  because  the  rates  thus  granted 
created  undue  preference  for  these  centres  at  the  expense 
of  intermediate  points  not  so  favored.  There  was  also 
market  competition  arising  from  the  demand  of  various 
producing  centres,  such  as  lumber-mills  located  at  differ- 
ent points,  to  be  placed  on  an  equality  in  competitive 
markets.  Here  the  Commission  recognized  the  force  of 
the  argument,  but  decided  that  this  situation  alone  was 
not  sufficient  ground  for  relief.  In  general  it  may  be 
said  that  it  has  been  the  effort  of  the  Commission  to  con- 
struct a  harmonious  and  properly  graded  rate  structure, 
freed  from  the  anomalies  of  the  earlier  situation,  and  its 
orders  have  compelled  on  the  part  of  carriers  a  revision 
of  their  entire  rate  structure  from  practically  all  the  terri- 
tory east  of  the  Mississippi  into  the  Southeast. 

Of  much  wider  application  were  the  controversies  that  in- 
volved the  trans-continental  situation — one  of  those  ever- 
lasting problems  which  has  persistently  dogged  the  foot- 

i  44  I.  C.  C.,  727-  230  I.  C.  C.,  153;  32  I.  C.  C,  61  (1914). 


34  RAILROADS  AND  GOVERNMENT 

steps  of  the  Commission.  The  history  of  this  situation 
has  been  many  times  described  and  explained  and  need 
be  only  summarized  here.  As  a  result  of  a  gradual  de- 
velopment of  water  transportation  between  the  Atlantic 
and  Pacific  seaboards,  a  real  competition  had  sprung  up 
soon  after  1870  between  water  and  rail  lines  which  defi- 
nitely held  the  rail  rates  down.  This  water  competition 
through  the  aid  of  rail  carriers  serving  the  Atlantic  sea- 
board gradually  reached  inland,  and  took  traffic  from 
points  as  far  west  as  Pittsburgh  or  even  farther,  and 
forced  the  rail  lines  carrying  traffic  westward  from  these 

/points  to  meet  the  joint  rail  and  water  rate  eastward. 
The  result  was  the  gradual  spread  of  a  blanket  from  the 
Atlantic  seaboard  as  far  west  as  water-line  influence  ex- 
tended, within  which  the  same  rate  was  charged  from  all 
points  westward  to  the  coast.  This  was  the  beginning 
of  the  blanket-rate  system.  Under  the  pretext  of  water 
competition,  the  blanket  was  steadily  widened  to  the  West, 
but  the  significant  influence  was  not  water  competition 
at  all,  which  obviously  became  less  influential  as  the  dis- 
tance from  the  Atlantic  seaboard  increased,  but  market 
pressure — the  demand  of  Middle-Western  manufacturing 
and  jobbing  interests  that  they  be  put  on  an  equality 
with  their  competitors  farther  east.  This  demand  was 
favorably  received  by  Western  carriers  because  if  the 
business  originated  in  the  West,  they  received  the  entire 
revenue  from  its  carriage,  whereas  if  it  originated  in 
the  East,  they  were  obliged  to  divide  the  receipts  with 
their  Eastern  connections.  By  1910  this  blanket  had 
been  so  widened  and  the  sound  theory  from  which  it 
started  so  perverted  that  the  same  rate  was  being  charged 
from  Omaha,  and  in  some  cases  even  from  Denver,  to  San 
Francisco  as  from  New  York.  By  no  process  of  inge- 
nious reasoning  could  such  an  absurd  anomaly  be  defended 
except  on  the  ground  that  it  had  simply  evolved.  But 
the  trouble  did  not  end  when  Denver  was  reached,  for 


THE  LONG  AND  SHORT  HAUL  35 

the  inter-mountain  territory  between  the  Rockies  and 
the  Sierra  Nevadas,  in  which  lie  many  important  indus- 
trial centres,  was  increasingly  discriminated  against,  just 
to  the  degree  that  the  blanket  rate  moved  westward. 
It  was  the  influence  of  this  section  through  its  represen- 
tatives in  Congress  that  amended  the  4th  Section,  and 
one  of  the  first  important  decisions  of  the  Commission 
following  this  amendment  related  to  the  trans-continental 
situation. 

Recognizing  that  the  system  in  use  had  gone  far  be- 
yond the  point  where  it  could  be  defended  on  economic 
grounds,  the  Commission  endeavored  to  create  a  rate 
structure  that  should  bring  into  full  and  predominating 
force  the  influence  of  water  competition,  which  was  the 
sole  justification  for  the  beginnings  of  the  system  and  the 
only  sound  reason  for  its  continuance.  It  declared  that 
the  intent  of  the  amended  law  was  to  make  the  prohibition 
of  the  higher  rate  for  the  shorter  haul  a  rule  of  well-nigh 
universal  application,  from  which  deviation  should  be 
permitted  only  in  special  cases  in  order  to  meet  transpor- 
tation conditions  that  were  beyond  the  carriers'  control.1 
It  divided  the  country  into  five  groups  or  zones.  Zone  I 
extended  from  the  Pacific  coast  eastward  to  a  line  drawn 
from  the  Canadian  boundary  in  Lake  Superior  southwest 
to  Sioux  City  and  thence  south  to  the  Gulf.  Zone  II 
extended  east  of  Zone  I  to  a  line  from  the  Straits  of  Macki- 
naw south  through  Lake  Michigan  and  on  to  the  Gulf. 
Zone  III  was  east  of  Zone  II,  north  of  the  Ohio,  and 
bounded  on  the  east  by  a  line  from  Buffalo  to  Pittsburgh. 
Zone  IV  included  all  territory  east  of  Zone  III  and  north 
of  the  West  Virginia  boundary  and  a  line  drawn  from 
Tennessee  to  the  Atlantic  coast.  Zone  V,  which  was  not 
included  in  the  decision,  was  the  remaining  territory  of 
the  Southeast.  Within  Zone  I  there  was  to  be  no  higher 
rate  to  an  intermediate  point  than  to  Pacific  coast  termi- 
1 21 1.  C.  C.,  329  (June,  1911). 


36  EAILROADS  AND  GOVERNMENT 

nals;  in  Zones  II,  III,  and  IV  the  intermediate  rate  was 
not  to  exceed  the  terminal  rate  by  more  than  7  per  cent, 
15  per  cent,  and  25  per  cent  respectively.  It  will  be  ob- 
served that  the  Commission  did  not  actually  fix  the  rates. 
It  left  with  the  carriers  the  option  of  raising  the  rates  to 
the  coast  or  of  lowering  the  intermediate  rates.  It  sim- 
ply prescribed  the  width  of  the  differential. 

An  appeal  was  taken  by  the  railroads  to  the  Commerce 
Court,  and  the  decision  of  the  latter  enjoining  the  Com- 
mission's order  serves  to  define  the  issue.  This  court 
held  in  the  first  place  that  the  Commission  had  no  power 
to  distinguish  between  water  competition  and  "market 
competition,"  and  that  the  prevalence  of  competition 
beyond  the  carriers'  control  was  sufficient  ground  for 
departure  from  the  long  and  short  haul  section  regardless 
of  the  nature  of  the  competition.  Again  the  court  held 
that  the  Commission  was  not  concerned  with  the  rela- 
tion of  terminal  to  intermediate  rates,  provided  inter- 
mediate rates  were  not  unreasonable,  but  only  with  the 
question  whether  lower  rates  could  be  charged  at  the 
terminal  point.  It  had  no  power  to  prescribe  a  differ- 
ential relationship  between  the  two.  The  case  went  to 
the  Supreme  Court,  and  in  every  respect  the  Commission 
was  upheld.1  On  the  question  of  the  relationship  of 
rates,  the  court  said  that  the  prime  object  of  the  transfer 
to  the  Commission  of  power  previously  lodged  in  the 
carriers,  through  the  elimination  of  the  "similar  circum- 
stances and  conditions"  clause,  was  to  vest  the  Commis- 
sion with  authority  to  consider  competitive  conditions 
and  their  relation  to  persons  and  places.  Necessarily 
there  went  with  this  power  the  right  to  do  that  by  which 
alone  it  could  be  exerted.  The  constitutional  objection 
that  the  4th  Section  delegated  to  the  Commission  legis- 
lative power  was  held  to  be  without  merit. 

Following  the  court's  decision,  the  carriers  took  steps 
1 234  U.  S.,  476,  495  (1914). 


THE  LONG  AND  SHORT  HAUL  37 

to  put  the  zone  system  of  rate-making  into  effect,  but 
when  it  came  to  its  application  to  specific  commodities, 
it  was  discovered  that  the  situation  had  materially 
changed  since  the  original  decision  of  the  Commission 
in  1911,  brought  about  by  the  opening  of  the  Panama 
Canal  at  the  time  of  the  outbreak  of  the  European  War. 
Traffic  through  this  waterway  in  late  1914  and  early  1915 
was  double  that  ever  carried  by  water  in  pre-canal  days, 
and  in  certain  kinds  of  traffic  the  competition  was  becom- 
ing not  only  severe  but  determining  as  to  rates.  So  far 
as  commodities  moving  on  class  rates  were  concerned, 
there  was  no  problem.  Rates  to  the  Pacific  coast  were 
strictly  in  accord  with  the  long  and  short  haul  provision. 
But  with  traffic  taking  commodity  rates,  handled  largely 
in  car-load  lots,  the  situation  was  quite  otherwise.  This 
traffic  fell  into  three  classes.  The  first  class  contained 
articles  that  moved  only  by  rail  and  in  which  the  long  and 
short  haul  principle  could  be  and  was  maintained.  A 
second  class  was  adapted  to  either  rail  or  water  carriage. 
For  many  years  prior  to  the  opening  of  the  canal,  the 
Commission  had  authorized  lower  coast  rates  because  of 
the  decided  influence  of  water-carriage.  To  these  com- 
modities the  zone  rate  structure  was  to  apply.  Articles 
of  the  third  class  were  produced  in  Atlantic  and  Middle- 
Western  territory,  were  pre-eminently  adapted  to  water- 
carriage,  and  normally  moved  in  large  volume  in  that 
fashion.  Such  commodities  were  canned  goods,  earthen 
and  stone  ware,  hardware  and  tools,  twine  and  cordage, 
hemp,  paint,  wire,  and  iron  and  steel  articles.  Here  the 
water  rate  was  definitely  controlling,  not  only  for  com- 
modities produced  on  or  near  the  seaboard  but  as  far 
inland  as  Pittsburgh,  Chicago,  and  the  Missouri  River, 
because  traffic  could  not  move  from  these  points  west- 
ward to  the  Pacific  coast  except  on  rates  approximately 
equal  to  the  rates  from  the  Atlantic  coast.  The  Com- 
mission recognized  the  situation  by  granting  further  modi- 


RAILROADS  AND   GOVERNMENT 


fications  in  the  existing  scheme,  as  the  result  of  which 
intermediate  rates  could  exceed  Pacific  coast  rates  by  a 
larger  differential  than  originally  prescribed,  but  the 
maximum  intermediate  rate  was  definitely  fixed  and  the 
terminal  rates  were  made  applicable  only  to  those  points 
which  were  ports  of  call  for  Atlantic-Pacific  freight 
steamers.1  Traffic  eastward  from  California  points  was 
likewise  affected  by  the  opening  of  the  canal,  although 
rail  rates  had  not  been  blanketed  eastward  to  the  same 
degree.  California  products  such  as  fruits,  wines,  canned 
goods,  and  grain  were  going  largely  by  water.  Relief  was 
given  the  rail  carriers  by  granting  them  permission  to  offer 
car-load  rates  on  certain  commodities  from  Pacific  to  At- 
lantic ports  lower  than  the  rates  from  intermediate  Cali- 
fornia points  to  the  same  destinations.2 

But,  unfortunately  for  the  Commission,  the  situation 
refused  to  remain  stable.  Late  in  1915  slides  closed  the 
canal  to  traffic,  and  before  it  was  again  operating  the 
demand  for  ships  in  the  carrying  trade  for  war  purposes 
had  diverted  most  of  the  coastwise  shipping.  Inter- 
mountain  sections  thereupon  called  the  Commission's 
attention  to  the  lack  of  any  further  water  competition. 
This  led  to  a  reopening  of  all  "4th-Section  applications" 
in  which  permission  had  been  granted  for  lower  rates  to 
the  coast  points,  both  Atlantic  and  Pacific,  than  were 
granted  to  intermediate  points.  The  Commission  found 
that  water  competition  was  now  a  negligible  factor,  and 
ordered  a  restoration  of  all  trans-continental  rates  in 
harmony  with  the  distance  principle.3  In  revising  their 
rates  the  carriers  decided  to  increase  certain  of  their 
terminal  rates  instead  of  lowering  their  intermediate 
rates.  Again  the  Commission  was  called  upon  by  pro- 
testing shippers,  and  again,  in  January,  1918,  it  made  ad- 
justments approving  in  part  the  action  of  the  carriers. 

l39l.C.  C.,  611  (January,  1915);  34  I.  C.  C.f  13  (April,  1915). 
'33  I.  C.  C,  480  (1915).  '4«  I.  C.  C.,  79  d9i«). 


THE  LONG  AND  SHORT  HAUL 


39 


"Thereby  was  removed,"  says  the  Commission,  "a  long- 
standing cause  of  irritation  to  the  inter-mountain  country 
and  a  prolific  source  of  complaints  to  the  Commission." 

But  the  unquenchable  vitality  of  a  competitive  market 
problem  was  again  demonstrated  when  in  1921  an  asso- 
ciation of  shippers'  organizations  and  state  commissions 
in  inter-mountain  territory  complained  that  the  Pacific 
coast  was  being  given  unreasonable  preference  because 
the  commodity  rates  were  not  graded  to  afford  inter- 
mediate territory  the  full  benefit  of  its  location  nearer 
the  East.  It  was  paying  the  same  rates  on  most  traffic 
from  the  East  as  were  Pacific  coast  points.  The  Com- 
mission held  that  the  charge  of  undue  prejudice  against 
inter-mountain  territory  was  not  sustained,  and,  that 
the  carriers  were  warranted,  in  their  discretion,  in  con- 
tinuing the  existing  blanket  adjustment.1  While  coast- 
wise shipping  was  not  as  abundant  as  earlier,  yet  there 
was  ample  evidence  that  it  would  further  develop,  and 
that  competition  would  soon  be  felt  in  a  serious  loss  in 
tonnage,  unless  the  carriers  had  available  appropriate 
measures  to  meet  the  situation.  This  clearly  indicates 
an  expectation  on  the  part  of  the  Commission  that  in  the 
not  distant  future  it  will  again  be  called  upon  to  approve 
competitive  rates  to  the  coast  lower  than  those  charged 
to  intermediate  points. 

These  experiments  in  rate-making  in  the  West,  which 
first  developed  a  blanket  system  and  then  a  series  of 
zones,  raises  a  fundamental  question  as  to  whether  we 
have  in  this  country  any  conscious  and  far-sighted  system 
of  rate  construction,  or  whether  the  rates  are  actually 
the  confused  and  unscientific  and  haphazard  maze  that 
they  appear  to  be.  Is  the  policy  of  national  growth  and 
non-interference  the  most  enlightened  policy  for  a  great 
territory  like  ours?  In  this  connection  it  is  helpful  to 
quote  the  opinion  of  the  Jate  Franklin  K.  Lane,  one  of 
1 61  I.  C.  C,  226. 


40  RAILROADS  AND  GOVERNMENT 

the  ablest  members  that  the  Interstate  Commerce  Com- 
mission ever  had.1 

"This  case,  when  broadly  regarded,  involves  a  ques- 
tion of  the  highest  national  importance.  What  is  to 
be  our  policy  with  respect  to  the  movement  of  traffic? 
Shall  the  country  be  treated  as  a  whole  for  commercial 
purposes,  or  shall  it  be  infinitely  divided  ?  In  our  postal 
service  we  deal  with  the  country  as  a  unit.  As  to  our 
railroads  there  is  no  uniform  policy,  even  upon  the  same 
lines  or  systems.  In  some  parts  of  the  country  rates 
are  on  an  almost  strictly  mileage  basis,  every  10  miles 
that  is  passed  adding  to  the  rate.  In  other  territory 
we  have  a  system  of  small  zones  or  groups  which  are 
placed  upon  a  common  basis — a  scheme  of  rate  making 
that  has  worked  most  happily  in  the  country  to  the 
east  of  the  Mississippi  River  and  which,  it  seems  to  me, 
should  be  extended  westward.  The  whole  continent 
for  a  zone  of  2,000  miles  is  made  to  serve  the  Pacific 
coast  terminal  cities  at  uniform  rates,  while  the  states 
between  the  mountains  are  not  given  such  advantage. 
So,  too,  on  California  products  generally,  and  not  alone 
upon  citrus  fruits,  the  United  States  east  of  the  Rockies 
is  placed  in  a  great  zone  to  which  a  uniform  rate  is  made. 
At  the  same  time,  the  lumber  of  the  far  northwest  is  not 
so  treated,  nor  the  wool  or  hides  of  the  interior. 

"Perhaps  the  United  States  will  one  day  declare  a 
policy  of  its  own  in  this  regard.  Primarily  it  is  a  matter 
of  national  concern  and  not  of  railroad  policy  as  to  what 
system  of  rate  making  shall  obtain  so  long  as  the  car- 
riers receive  a  reasonable  return  upon  the  value  of  their 
property.  The  people  may  say  (i)  that  railroad  rates 
shall  be  made  so  as  to  carry  all  products  into  all  markets 
within  the  four  lines  of  the  country;  or  (2)  that  after  a  cer- 
tain narrow  limit  is  passed  the  whole  of  the  land  shall  be 
»22  I.  C.  C.,  157-158. 


THE  LONG  AND  SHORT  HAUL  41 

one  zone;  or  (3)  a  system  of  rates  that  will  keep  producers 
and  consumers  as  near  together  as  possible  and  eliminate 
waste  in  transportation.  These  are  national  questions. 
They  go  to  the  very  future  of  our  industrial  life.  Upon 
their  determination  depends  the  character  of  the  farm 
products  and  the  nature  of  the  industries  in  the  various 
sections  of  the  country.  The  railroad  by  its  rates  may 
make  each  portion  of  the'  country  largely  independent  of  / 
the  remainder  or  it  may  make  of  the  Nation  one  eco- '» 
nomic  and  industrial  unit,  each  portion  thereof  doing  j 
best  what  nature  has  fitted  it  to  do  best.  This  is  f unda-  j 
mentally  the  difference  in  the  philosophy  which  underlies' 
the  two  methods  of  making  rates  which  have  been  given 
consideration  in  this  case.  Without  any  expression  of 
policy  from  Congress  we  accept  the  policy  which  the 
railroads  themselves  have  made,  considering  that  upon 
the  whole  the  results  arising  from  such  policy  do  not 
conflict  with  the  provisions  of  the  law.  There  is  no  doubt 
in  my  mind  but  that  the  Commission  could  not  itself 
prescribe  a  blanket  similar  to  that  obtaining  here  and 
which  we  are  approving  because  neither  the  carriers  nor 
the  shippers  wish  it  destroyed." 

One  interesting  outcome  of  this  long  controversy  in 
trans-continental  territory  was  a  Supreme  Court  interpre- 
tation of  the  water-competition  clause  of  the  4th  Section. 
In  the  readjustment  of  rates  following  the  disappearance 
of  Panama  Canal  competition  certain  rates  to  the  Pacific 
coast  had  been  increased.  This  increase  was  protested 
by  a  Seattle  corporation  as  a  violation  of  the  clause  which 
provides  that  when  a  rail  carrier  reduces  its  rates  in  com- 
petition with  a  water  rate,  it  shall  not  be  permitted  to 
increase  such  rates  unless  after  hearing  by  the  Commis- 
sion it  shall  be  found  that  the  proposed  increase  rests 
upon  changed  conditions  other  than  the  elimination  of 
water  competition.  Read  by  itself,  said  the  Supreme 


42  RAILROADS  AND  GOVERNMENT 

Court,  the  clause  would  be  capable  of  the  construction 
given  to  it  by  the  complainant,  but  read  in  connection 
with  the  duties  and  powers  of  the  Commission  as  expressed 
in  other  clauses  of  the  section  and  in  other  sections  of  the 
Act,  it  could  have  no  such  narrow  application.  Ob- 
viously if  the  Commission  is  intrusted  with  authority 
to  lower  terminal  rail  rates  in  order  to  meet  water  compe- 
tition, it  cannot  be  deemed  helpless  to  raise  them  again 
if  competitive  conditions  are  altered.  Any  other  con- 
struction would  insure  monopoly  rather  than  preserve 
competition1  and  would  make  a  farce  of  our  whole  sys- 
tem of  rate  regulation. 

»249U.  S.,  557  (1919). 


CHAPTER  IV 

THE   COMMERCE   COURT 

OF  the  proposals  of  the  Administration  in  1910  for 
amending  the  Interstate  Commerce  Act,  the  only  one  of 
any  importance  which  became  law  was  that  creating  the 
ill-fated  Commerce  Court.  This  involved  no  new  princi- 
ple of  regulation.  It  was  a  device  to  improve  procedure. 
All  suits  under  the  Interstate  Commerce  and  Elkins  Acts 
were  to  be  handled  by  this  special  court  of  five  judges, 
from  which  direct  appeal  was  to  be  taken  to  the  Supreme 
Court.  Every  effort  was  made  to  simplify  the  process 
and  eliminate  delay.  It  was  argued  that  a  body  of  judges 
that  handled  exclusively  questions  of  interstate  commerce 
would  be  more  expert  in  this  highly  technical  field  and 
that  the  contrariety  of  opinion  issuing  from  different 
circuits  would  be  done  away  with.  But  if  it  were  to  be- 
come genuinely  expert,  why  limit  the  term  of  a  judge  to 
five  years  ?  And  why  was  it  not  the  duty  of  the  Supreme 
Court  to  harmonize  the  conflicting  decisions  of  the  differ- 
ent circuits  ?  And  was  there,  after  all,  a  sufficient  amount 
of  this  litigation  to  keep  such  a  court  occupied? 

Technical  questions  of  procedure  could  hardly  have 
called  forth  any  wide  popular  interest,  and  this  is  doubt- 
less the  reason  that  the  proposal  for  a  special  court  be- 
came a  law  at  all.  But  even  then  the  "insurgents"  took 
a  hand  to  prevent  the  scheme  from  becoming  too  formal 
and  thoroughly  enveloping  itself  in  the  dignified  atmos- 
phere of  the  court.  Although  cases  were  thereafter  to 
be  in  the  hands  of  the  Attorney-General  rather  than  of  the 
Commission,  which  was  no  longer  to  be  permitted  to  be 
investigator,  judge,  and  prosecutor  at  the  same  time, 
yet  the  law  permitted  the  intervention  of  the  Interstate 

43 


44  RAILROADS  AND   GOVERNMENT 

Commerce  Commission  and  all  other  parties  in  interest, 
including  communities,  associations,  corporations,  firms, 
and  individuals.  Shippers  protested  that  in  these  com- 
plicated cases  in  which  commercial  and  industrial  factors 
were  of  more  importance  than  legal  principles,  there  was 
no  assurance  that  the  Department  of  Justice  alone  could 
handle  the  cases  competently  and  to  a  successful  issue, 
and  there  was  much  experience  to  justify  their  protests. 

Later  during  the  attacks  upon  the  court  by  the  public 
and  Congress,  the  Attorney-General  came  to  its  defense 
in  his  annual  reports,  recommending  at  the  same  time 
certain  modifications  in  procedure.  This  liberality  in 
intervention  was  singled  out  for  particular  attack  and 
was  consistently  opposed  by  the  Department  of  Justice 
so  long  as  the  court  survived.  In  reply  to  many  criti- 
cisms, the  Attorney- General  showed1  that  the  Commerce 
Court  was  much  more  expeditious  than  the  general 
courts  had  been  previously,  that  it  had  upheld  the  Com- 
mission in  a  larger  percentage  of  cases,  and  that  it  had 
granted  injunctions  with  less  frequency.  Nevertheless, 
it  had  to  go,  and  the  reasons  therefor  are  of  sufficient 
significance  to  warrant  careful  examination. 

While  the  situation  was  doubtless  seized  upon  and 
the  mistakes  of  the  Commerce  Court  exaggerated  for 
political  advantage,  yet  the  offense,  simply  stated,  was 
that  the  Commerce  Court  attempted  to  obstruct  the 
Commission  in  the  exercise  of  powers  granted  by  law  and 
sustained  by  the  highest  court.  For  two  decades  the 
Commission  had  suffered  the  irritating  delays  occa- 
sioned by  court  interference  with  the  exercise  of  its 
authority,  in  which  the  court  had,  to  be  sure,  accepted 
the  facts  brought  before  the  Commission  as  prima  facie 
evidence,  but  had  declined  to  be  limited  to  this  evidence 
and  had  frequently  reopened  cases  from  the  beginning. 
This  assertion  of  original  jurisdiction  by  the  lower  courts 
1  Annual  Report,  Attorney-General  U.  S.,  1912. 


THE   COMMERCE  COURT  45 

had  been  frowned  upon  by  the  Supreme  Court,1  but  there 
was  no  way  to  put  a  stop  to  it  until  the  passage  of  the 
amendment  in  1906  which  specifically  provided  that 
"if  upon  such  hearing  as  the  court  may  determine  to 
be  necessary,  it  appears  that  the  order"  (of  the  Com- 
mission) "was  regularly  made  and  duly  served,  and  that 
the  carrier  is  in  disobedience  of  the  same,  the  court  shall 
enforce  obedience  to  such  order."  2  This  clause  which 
was  to  be  the  corner-stone  of  the  structure  of  adminis- 
trative regulation  erected  by  the  Commission,  was  defi- 
nitely interpreted  by  the  Supreme  Court  a  few  months 
before  the  creation  of  the  Commerce  Court,  and  should 
have  been  ample  notice  to  that  new  body  as  to  the  limi- 
tation of  its  functions.  In  this  case,  which  involved  a 
technical  question  of  the  distribution  of  coal-cars  in  time 
of  shortage,  the  Supreme  Court  refused  to  enter  into 
the  merits  of  the  controversy,  but  contented  itself  with 
deciding  whether  the  Commission  had  acted  within  the 
limits  prescribed  by  the  statute,  and  had  proceeded  con- 
stitutionally. This  having  been  decided  in  favor  of 
the  Commission,  its  action  was  within  its  administrative 
discretion  and  was  not  reviewable.  This  decision  marks 
a  turning-point  in  the  career  of  the  Commission,  a  final 
recognition  of  a  power  in  which  discretion  was  given 
wide  range.  The  significant  paragraph  of  the  decision  is 
this:3 

"Beyond  controversy,  in  determining  whether  an  order 
of  the  Commission  shall  be  suspended  or  set  aside,  we 
must  consider,  a,  all  relevant  questions  of  constitutional 
power  or  right;  b,  all  pertinent  questions  as  to  whether 
the  administrative  order  is  within  the  scope  of  the  dele- 
gated authority  under  which  it  purports  to  have  been 

1  Social  Circle  Case,  162  U.  S.,  184  (1896).  2  Sec.  16. 

3 1.  C.  C.  v.  Ills.  Cent.  R.  R.  Co.,  215  U.  S.,  452,  January,  1910.  See 
also  215  U.  S.  481. 


46  RAILROADS  AND   GOVERNMENT 

made;  and,  c,  a  proposition  which  we  state  independently, 
although  in  its  essence  it  may  be  contained  in  the  pre- 
vious one,  viz.,  whether,  even  although  the  order  be  in 
form  within  the  delegated  power,  nevertheless  it  must 
be  treated  as  not  embraced  therein,  because  the  exertion 
of  authority  which  is  questioned  has  been  manifested  in 
such  an  unreasonable  manner  as  to  cause  it,  in  truth,  to 
be  within  the  elementary  rule  that  the  substance,  and 
not  the  shadow,  determines  the  validity  of  the  exercise 
of  the  power.  Postal  Telegraph  Cable  Co.  v.  Adams,  755 
U.  S.,  688,  6p8.  Plain  as  it  is  that  the  powers  just 
stated  are  of  the  essence  of  judicial  authority,  and  which, 
therefore,  may  not  be  curtailed,  and  whose  discharge 
may  not  be  by  us  in  a  proper  case  avoided,  it  is  equally 
plain  that  such  perennial  powers  lend  no  support  what- 
ever to  the  proposition  that  we  may,  under  the  guise 
of  exerting  judicial  power,  usurp  merely  administrative 
functions  by  setting  aside  a  lawful  administrative  order 
upon  our  conception  as  to  whether  the  administrative 
power  has  been  wisely  exercised.  Power  to  make  the 
order  and  not  the  mere  expediency  or  wisdom  of  having 
made  it,  is  the  question." 

In  the  vast  majority  of  controversies,  no  constitutional 
question  could  arise.  It  would  be  virtually  impossi- 
ble for  a  carrier  ordinarily  to  show  that  a  reduction  or 
the  denial  of  an  increase  in  a  rate,  or  even  a  schedule  of 
rates,  would  deprive  it  of  its  property  without  due  proc- 
ess. So  long  as  the  Commission  acted  within  the  limi- 
tations imposed  by  the  statute,  its  authority  in  the  vast 
majority  of  instances  was  to  remain  thereafter  undis- 
turbed.  But  the  Commerce  Court,  composed  of  compe- 
tent jurists,  wholly  failed  to  grasp  this  fact,  whether 
wilfully  or  not  it  is  impossible  to  say.  Repeatedly  it 
attempted  to  enter  into  the  merits  of  the  controversy, 
to  review  the  facts,  to  pass  judgment  upon  the  Com- 


THE   COMMERCE  COURT  47 

mission's  interpretations,  and  in  one  instance  at  least 
to  begin  the  case  again  in  its  own  court,  and  with  unvary- 
ing regularity  its  position  was  overruled  by  the  Supreme 
Court,  substantially  on  the  grounds  already  quoted  from 
the  Illinois  Central  Coal-Car  Distribution  Case. 

A  few  illustrations  will  make  the  controversy  clear. 
An  order  by  the  Commission  upon  water  carriers  to  make 
reports  concerning  all  their  business  under  Section  20 
of  the  Act,  whether  the  business  was  under  the  jurisdic- 
tion of  the  Commission  or  not,  was  set  aside  by  the 
Commerce  Court  on  the  ground  that  the  Commission 
had  exceeded  its  authority.  Here  the  court  was  clearly 
within  its  rights,  as  its  decision  involved  a  legal  question 
simply — the  interpretation  of  the  powers  of  the  Com- 
mission. But  the  Supreme  Court  held  that  the  Com- 
merce Court  erred  in  granting  the  injunction  and  that 
the  Commission  had  authority  to  require  all  the  infor- 
mation asked  for.1 

The  specific  nature  of  the  issue  between  the  Com- 
mission and  the  court  is  well  exemplified  in  the  Pacific 
Coast  Switching  Cases,  in  which  the  Commission,  after 
a  long  investigation,  concluded  that  the  charges  imposed 
by  railroads  for  spotting  cars  on  private-industry  tracks 
were  unlawful,  and  ordered  the  carriers  to  cease  from  im- 
posing them  longer.  The  Commerce  Court  enjoined  the 
order  of  the  Commission  after  careful  examination  of 
the  facts  upon  which  the  order  rested.  This  action  it 
defended  by  the  argument  that  the  facts  in  the  case  were 
undisputed,  and  therefore  the  court  was  free  to  reach  a 
different  conclusion  concerning  them  than  that  reached 
by  the  Commission.  "Where  the  facts  are  undisputed 
there  is  no  occasion  for  facts  to  be  found,  and  the  ulti- 
mate conclusion  of  the  Commission  is  a  mixed  question 
of  law  and  fact  which  certainly  ought  not  to  be  held  to 

1 1.  C.  C.  v.  Goodrich  Transit  Co.,  224  U.  S.,  194  (1912).  See  also 
231  U.  S.,  423  (1913). 


48  RAILROADS   AND   GOVERNMENT 

be   conclusive   upon   the   court."     Upon   this  ingenious 
argument  the  Commission  commented  as  follows: 

"Before  the  Commission  they  were  certainly  contro- 
verted questions  of  fact  upon  which  volumes  of  testimony 
were  introduced,  and  hours  of  argument  expended.  It 
is  difficult  to  imagine  an  instance  in  which  there  could  be 
a  more  sharply  denned  question  of  fact  than  this  very 
one  which  was  presented  to  and  decided  by  the  Com- 
mission. ...  If  the  Commerce  Court  is  correct  in  stat- 
ing that  where  the  facts  are  admitted,  it  is  for  that  court 
to  determine  whether  the  rate  is  unreasonable  or  the  dis- 
crimination undue,  then  ninety-nine  one-hundredths  of 
the  orders  of  this  Commission  can  be  reviewed  upon  the 
question  of  fact  by  the  courts." 

The  Supreme  Court  reversed  the  Commerce  Court 
and  held  that  the  finding  of  the  Commission  on  the  point 
at  issue  was  not  subject  to  judicial  review.1 

Issue  was  joined  again  in  a  case  involving  a  negative 
order.  The  Commission  dismissed  a  complaint  against 
the  railroads  for  levying  demurrage  upon  a  loaded  pri- 
vate car  standing  upon  the  track  of  its  owners,  and  held 
that  the  rule  was  reasonable  and  was  necessary  to  pre- 
vent discrimination.  Thereupon  Proctor  &  Gamble,  the 
complainants,  filed  a  petition  in  the  Commerce  Court 
asking  that  the  order  of  the  Commission  be  set  aside  and 
that  the  demurrage  rule  be  held  unlawful  and  its  opera- 
tion enjoined.  The  Commerce  Court  assumed  juris- 
diction, and  while  its  conclusion  was  identical  with  that 
of  the  Commission,  it  is  evident  that  it  could  have  reached 
no  conclusion  at  all  without  reviewing  the  facts  and  sub- 
stituting its  own  judgment  upon  them  for  that  of  the 
Commission.  Therefore  it  was  for  the  Supreme  Court 
to  say  whether  a  negative  order  of  the  Commission  was 
U.  S.,  294,  315  (1914). 


THE  COMMERCE   COURT  49 

reviewable,  whether,  in  other  words,  the  Commerce  Court 
could  acquire  jurisdiction  sufficient  to  take  up  the  case 
from  the  beginning.  The  conclusion  of  the  highest  court, 
after  a  thorough  examination  of  the  statute  and  a  review 
of  its  history,  was  that  the  jurisdiction  of  the  Commerce 
Court  was  confined  to  restraining  the  operations  of  the 
orders  of  the  Commission  and  that  it  possessed  no  affirma- 
tive authority  to  enforce  the  administrative  provisions 
of  the  Act.1 

That  this  continued  controversy  between  court  and 
Commission  did  not  proceed  without  friction  is  evident 
in  the  Commission's  comments  on  the  Lemon  Case. 
The  Commission  had,  upon  complaint  of  California 
growers,  refused  to  permit  an  increase  in  the  rate  on 
lemons.  This  order  of  the  Commission  was  enjoined  by 
the  Commerce  Court  because,  it  was  alleged,  the  Com- 
mission had  exceeded  its  authority,  in  that  it  was  at- 
tempting not  to  establish  a  reasonable  rate  but  to  pro- 
tect the  American  grower  against  the  competition  of 
his  Sicilian  rival.  And  this  because  the  Commission, 
in  discussing  the  lemon  rate,  had  devoted  a  page  and  a 
quarter  to  the  facts  of  foreign  competition  and  but  three- 
quarters  of  a  page  to  the  traffic  circumstances  of  the 
case.  In  commenting  upon  this  decision  in  its  Annual 
Report2  the  Commission  took  vigorous  issue  with  the 
court  for  its  insinuations,  and  denied  that  the  grounds 
suggested  by  the  court  were  the  grounds  of  the  decision. 
After  stating  its  position,  it  concluded  as  follows: 

"The  Supreme  Court  has  declared  that  the  making  of 
a  transportation  rate  for  the  future  is  a  legislative  and 
not  a  judicial  function.  It  has  further  apparently  de- 
clared that  this  function  may  be  exercised  by  Congress 
through  the  appointment  of  a  commission  acting  under 
rules  prescribed  by  it.  The  rate  when  fixed  is  just  as 

1225  U.  S.,  282  (1912).  *  1911,  pp.  58,  59. 


50  RAILROADS   AND   GOVERNMENT 

much  legislative  when  made  by  a  commission  as  when 
made  directly  by  the  legislature  itself. 

"That  being  so,  the  discretionary  power  involved  in 
reaching  the  conclusion  that  a  particular  rate  is  or  is 
not  reasonable  for  the  future,  or  that  a  particular  dis- 
crimination is  or  is  not  undue,  is  a  legislative  discretion 
which  cannot  be  reviewed  by  the  courts. 

"How  is  the  exercise  of  this  judgment  in  prescribing 
the  future  rate  any  the  less  legislative  because  there 
happens  to  be  no  dispute  about  the  facts  to  which  it  is 
applied?  Or  how,  if  the  conclusion  of  fact  reached  by 
this  Commission  cannot  be  reviewed  through  judicial 
process,  can  a  court  look  into  the  mind  of  the  Commis- 
sion for  the  purpose  of  determining  whether  that  con- 
clusion has  been  influenced  by  any  improper  motive  or 
consideration?" 

Within  two  months  of  the  court's  injunction  the  Com- 
mission rendered  a  second  opinion,  which  left  no  doubt 
as  to  its  exhaustiveness  or  the  grounds  upon  which  its 
conclusions  rested,  and  this  time  the  Commerce  Court 
refused  to  interfere.  In  this  position  it  was  sustained 
by  the  Supreme  Court.1 

Sufficient  has  been  said  to  render  clear  the  reasons 
other  than  political  for  the  demise  of  the  Commerce 
Court.  It  performed  a  valuable  service  in  strengthen- 
ing the  law  at  many  points,  and  it  was  by  no  means 
always  in  opposition  to  the  Commission  nor  favorably 
inclined  to  the  corporate  point  of  view.  It  was  unfortu- 
nate that  the  court  chose  to  interpret  its  authority  in 
such  fashion  as  to  bring  it  into  conflict  with  the  Com- 
mission and  to  bring  down  upon  it  the  condemnation  of 
the  Supreme  Court.  Whether  this  was  due  to  hostility 
to  the  Commission,  to  a  desire  to  create  for  itself  a  place 

1 19  I.  C.  C.,  148  (1910);  22  I.  C.  C,  149  (1911);  190  Fed.  Rep.,  591 
(1911). 


THE  COMMERCE   COURT  51 

in  the  judicial  system,  or  to  a  constitutional  inability  or 
unwillingness  to  surrender  final  authority  in  matters 
of  fact,  is  difficult  to  say.  Probably  it  was  a  combina- 
tion of  all  three.  It  is  possible  that  in  the  absence  of  a 
Commerce  Court  the  separate  district  courts  might  in 
the  same  manner  have  interfered  with  the  free  exercise 
of  authority  by  the  Commission,  but  the  fact  that  the 
opposition  was  concentrated  in  one  body  rendered  that 
body  conspicuous  and  drew  the  fire. 

The  situation  was  seized  upon  for  the  purpose  of  man- 
ufacturing political  capital.  By  a  combination  of  Demo- 
crats and  insurgents  the  court  was  finally  done  to  death, 
its  life  expiring  at  the  end  of  the  year  1913,  after  two  bills 
providing  for  its  abolition  had  been  vetoed  by  President 
Taft.  The  members  of  the  court  were  transferred  to 
the  circuits  and  the  experiment  was  at  an  end.  The 
Attorney- General  in  1912,  in  urging  a  continuance  of  the 
court,  had  expressed  the  view  that  the  functions  of  the 
two  bodies,  court  and  Commission,  were  not  clearly 
enough  defined,  and  had  made  suggestions  for  amend- 
ments to  the  law  that  would  confine  the  court's  review 
exclusively  to  questions  of  law  arising  in  connection  with 
the  Commission's  opinions  and  orders.  But  Congress 
was  not  persuaded.  The  Supreme  Court  had  found  a 
sufficiently  clear  distinction  in  the  existing  statute,  and 
the  only  method  of  reform  that  appealed  to  Congress 
was  that  which  wiped  the  offending  agency  out  of  exist- 
ence. 


CHAPTER  V 

ADMINISTRATIVE  ACTIVITIES 

EACH  revision  of  the  Act  to  Regulate  Commerce  added 
materially  to  the  administrative  functions  of  the  Com- 
mission. But  beyond  this,  Congress  took  occasion  from 
time  to  time  to  impose  upon  this  much  overworked  body 
duties  somewhat  alien  to  the  purpose  of  its  creation. 
It  had  for  a  time  supervision  over  the  accounts  of  public 
utilities  in  the  District  of  Columbia.  Changes  in  parcel- 
post  rates,  weights,  and  zones  were  made  subject  to  the 
consent  of  the  Commission.  Its  services  were  invoked 
to  define  the  time-zones  in  connection  with  daylight 
saving,  and  it  was  made  the  medium  for  the  sifting  of  evi- 
dence and  the  recommendation  to  the  President  of  the 
candidates  for  medals  of  honor  awarded  for  "extreme 
daring"  in  connection  with  railroad  accidents.  These 
miscellaneous  duties  are  of  relatively  little  importance 
except  that  they  draw  upon  the  time  and  energy  of 
the  Commission  needed  for  other  duties.  But  a  survey 
of  the  significant  developments  of  administrative  respon- 
sibility since  1910  will  serve  to  show  the  important  place 
that  this  body  now  occupies  in  our  governmental  sys- 
tem. 

Telegraph,  telephone,  and  cable  companies  were  made 
subject  to  the  Act  in  1910,  which  meant  the  regulation 
of  their  rates,  services,  and  accounts.  By  a  decision  of 
the  Supreme  Court  in  19 14*  the  power  of  the  Commis- 
sion over  pipe-lines,  granted  in  1906,  was  sustained.  The 
amendment  was  held  to  be  constitutional  and  was  inter- 
preted to  include  those  oil  companies  that  were  common 
carriers  in  substance  quite  as  fully  as  those  that  were 
carriers  in  fact.  The  practice  of  the  oil  companies,  the 
'234U.  S.,  548. 
52 


ADMINISTRATIVE  ACTIVITIES  53 

Standard  and  its  subsidiaries,  of  compelling  outsiders 
to  sell  to  them  their  oil  before  transportation,  was  held 
not  to  be  conclusive  that  the  transportation  itself  was  not 
interstate  commerce.  These  oil-transporting  companies 
were  required  to  obey  the  order  of  the  Commission  to 
file  their  rates  and  charges,  and  accounting  regulations 
have  been  prescribed  applicable  to  them. 

i .     Discrimination 

Violations  of  law  in  the  form  of  discriminations  and 
rebates  have  not  ceased.  On  the  contrary,  new  devices 
more  difficult  to  detect  have  been  employed,  while  many 
of  the  old  practices  that  were  present  at  the  beginning 
of  regulation  in  1887  recur  with  wearisome  regularity. 
False  claims  for  loss  and  damage,  false  billing,  failure  to 
observe  the  published  tariffs,  special  services  granted 
to  large  shippers,  concessions  resulting  from  alliances 
of  shipper  and  carrier,  failure  to  collect  demurrage,  lease 
of  carrier's  property  to  shipper  at  nominal  rental — these 
are  only  illustrations.  Shippers  apparently  still  regard 
railroads  as  legitimate  subjects  for  exploitation,  and  we 
have  still  a  long  way  to  go  before  the  minor  railroad 
official  at  least  will  realize  that  it  is  beneath  the  dignity 
and  responsibility  of  the  public-service  corporation  to 
resort  to  the  sharp  practices  of  the  dishonest  trader. 

Of  the  discrimination  evils  of  the  decade,  the  most 
significant  are  those  concerned  with  the  so-called  "  tap- 
lines,"  and  here  the  policy  of  the  Commission  received 
an  unfortunate  check  from  the  Supreme  Court.  These 
short  lines  of  road  were  usually  owned  by  industries  and 
employed  mainly  in  transporting  the  product  of  the  in- 
dustry to  a  connection  with  a  trunk  line.  They  were 
in  effect  plant  facilities.  But  by  incorporating  them  as 
common  carriers  and  offering  their  facilities  to  a  non- 
existent public,  they  were  able  to  make  traffic  arrange- 
ments with  the  trunk  lines  by  which  they  received  such  a 


54  RAILROADS  AND  GOVERNMENT 

handsome  proportion  of  the  through  rate  that  it  amounted 
to  a  rebate.  The  Commission  held  that  the  common- 
carrier  function  was  a  mere  device.  But  the  Supreme 
Court  said1  that  the  Commission  had  no  power  so  to 
declare  when  public  policy,  as  evidenced  by  legislation, 
had  recognized  tap-lines  as  common  carriers;  that  a  tap- 
line  if  entitled  to  a  division  of  the  rate  on  outside  busi- 
ness was  equally  entitled  to  it  on  the  business  of  its  pro- 
prietary industry,  and  that  the  question  of  fixing  the 
division  of  joint  rates  so  as  to  prevent  discrimination 
and  rebating  was  entirely  in  the  hands  of  the  Commis- 
sion. Following  this  decision,  the  Commission  has  ex- 
amined each  tap-line  case  on  its  merits,  determining  first 
of  all  whether  as  a  matter  of  fact  it  is  a  common  carrier 
and  then  fixing  a  maximum  limit  to  the  charge  for  its 
services.2  But  even  as  late  as  1918  the  Commission 
was  still  struggling  with  the  fundamental  principles  in- 
volved. In  a  case  in  that  year  it  suggested  that  in  view 
of  the  variance  of  opinion  entertained  in  the  Commis- 
sion and  elsewhere  upon  the  many  important  and  diffi- 
cult questions  so  frequently  arising  out  of  the  relations 
between  the  trunk-line  carriers  and  the  industries  with 
railroads  of  their  own,  the  rulings  in  this  case  which  pre- 
sented conditions  that  were  fairly  characteristic  "should 
be  reviewed  by  the  courts  in  order  that  some  definite 
principle  may  be  judicially  established  by  which  we  may 
hereafter  be  guided  in  such  cases  as  they  arise."3 

2.     Commodities  Clause 

Through  persistent,  prosecution  by  the  Government 
and  interpretation  by  the  Supreme  Court  the  "com- 

1234U.  S.,  i,  (1914). 

1  In  240  U.  S.,  294  (1916),  the  Supreme  Court  sustained  the  power  of 
the  Commission  to  prescribe  the  proportion  of  the  through  rate  to  be 
enjoyed  by  the  tap-line,  incidentally  sustaining  the  power  to  make 
joint  rates  granted  to  the  Commission  by  the  Act  of  1910. 

3  50  I.  C.  C.,  504. 


ADMINISTRATIVE  ACTIVITIES  55 

modi  ties  clause"  of  the  Act  has  gradually  assumed  the 
form  and  effectiveness  that  Congress  originally  intended. 
This  clause  was  enacted  in  1906,  and  provided  that  after 
May  i,  1908,  it  should  be  unlawful  for  a  railroad  to  trans- 
port in  interstate  commerce  any  commodity  other  than 
timber  or  its  manufactures,  which  it  owned  in  whole  or 
in  part,  or  in  which  it  had  any  interest,  direct  or  indirect, 
except  such  commodities  as  were  necessary  and  intended 
for  its  use  in  its  business  as  a  common  carrier.  This 
legislation  was  designed  primarily  to  effect  a  complete 
separation  of  coal-mining  and  transportation,  and  thus 
wipe  out  the  close  associations  out  of  which  sprang  uni- 
fication in  management  and  confusion  in  accounts,  to 
the  detriment  of  all  outside  competitors.  The  relation- 
ship took  various  forms — in  some  a  direct  ownership  and 
operation  of  mines  by  railroad  companies,  in  others  an 
ownership  by  the  railroads  of  the  stock  of  the  coal  com- 
panies. 

The  first  test  of  this  clause  in  1909  was  distinctly  dis- 
appointing, because  the  court,  taking  the  legalistic  point 
of  view,  seemed  to  consider  the  preservation  of  the  indi- 
viduality of  the  corporate  entity  of  more  importance 
than  the  public  interest  as  expressed  in  the  statute.  It 
held  that  when  a  railroad  had  stock  in  a  coal  company, 
it  did  not  have  a  legal  interest  in  the  commodity  pro- 
duced, and  that  the  ownership  of  the  stock  of  a  producing 
corporation  did  not  violate  the  commodities  clause  when 
the  corporation  was  organized  in  good  faith.  Moreover, 
a  railroad  was  not  carrying  its  own  coal  even  though  it 
previously  owned  and  mined  it,  if  it  sold  the  coal  to 
another  company  at  the  pit  mouth.1  No  more  helpful 
guidance  could  have  been  offered  by  expert  counsel  to 
those  companies  that  were  seeking  a  way  around  the 
law.  Had  the  court  taken  the  spirit  rather  than  the 
letter  of  the  statute  it  would  have  followed  the  line  laid 
1 213  U,  S.,  366  (1909). 


56  RAILROADS  AND  GOVERNMENT 

down  by  that  sturdy  dissenter,  Justice  Harlan,  who  de- 
clared that  the  Act  when  reasonably  and  properly  con- 
strued, included  a  railroad  transporting  coal  if  it  at  the 
time  was  the  owner  legally  or  equitably  of  stock — cer- 
tainly if  it  owned  a  majority  or  all  the  stock — in  the 
company  that  mined,  manufactured,  and  then  owned 
the  coal  which  was  being  transported.  Any  other  view 
would  enable  the  transporting  railroad  by  one  device  or 
another  to  defeat  altogether  the  purpose  that  Congress 
had  in  mind.1 

The  coal-mining  railroad  companies  proceeded  prompt- 
ly to  follow  the  suggestions  of  the  court,  and  when  neces- 
sary, to  create  corporations  for  the  purpose  of  effecting 
technically  legal  separation.  For  example,  the  Dela- 
ware, Lackawanna  and  Western,  a  corporation  un- 
hampered by  complicated  mortgages  and  intercorporate 
relationships,  organized  a  separate  coal  company  and  sold 
its  coal  to  this  company  at  the  mine  mouth  under  a  closed 
contract.  In  view  of  the  later  decision  of  the  court,  it 
is  to  be  observed  that  the  stock  of  the  coal  company  was 
distributed  pro  rata  and  without  payment  among  the 
Lackawanna  stockholders.  The  Lehigh  Valley  already 
had  a  coal  company  whose  stock  it  owned,  but  this  stock 
was  pledged  under  a  general  mortgage  and  hence  diffi- 
cult to  disturb.  Accordingly,  it  organized  a  sales  com- 
pany to  which  the  coal  company  sold  the  coal  at  the  mine, 
and  which  in  turn  contracted  with  the  railroad  for  its 
carriage !  There  is  humor  even  in  corporation  finance. 

The  Lehigh  Valley  Case  reached  the  Supreme  Court 
in  191 1,2  that  of  the  Lackawanna  in  191 5. 3  Chief  Jus- 
tice White,  who  gave  the  original  legalistic  opinion  in 
1909,  delivered  the  opinion  in  the  Lehigh  Valley  Case. 

1  In  the  Mann-Elkins  Act  of  1910  an  attempt  was  made  to  express 
more  clearly  the  original  intent  of  Congress  by  an  amendment  that 
would  prohibit  stock  ownership  in  coal  companies  by  railroads,  but 
the  attempt  failed. 

•  220  U.  S.,  257.  '238  U.  S.,  516. 


ADMINISTRATIVE  ACTIVITIES  57 

He  held  that  while  stock  ownership  by  a  railroad  in  a 
bona  fide  corporation  irrespective  of  the  extent  of  this 
ownership  does  not  preclude  a  railroad  from  transport- 
ing the  commodity  produced  or  owned  by  the  subsidiary 
corporation,  it  is  still  open  to  the  Government  to  question 
the  right  of  the  railroad  to  transport  such  commodity 
when  it  uses  its  power  as  a  stockholder  to  obliterate  all 
distinctions  between  the  two  corporations.  The  rail- 
road cannot  so  commingle  its  affairs  with  the  corpora- 
tion owned  as  to  cause  the  two  to  become  one  and  in- 
separable. In  both  this  and  the  Lackawanna  case  the 
railroads  were  held  to  be  in  violation  of  both  the  Anti- 
Trust  Act  and  the  commodities  clause  of  the  Interstate 
Commerce  Act. 

This  was  an  encouraging  advance  by  the  court  upon 
its  earlier  position.  It  still  remained  to  dispose  of  the 
corporate  arrangement  illustrated  by  the  Reading  Com- 
pany, which  from  the  purely  legal  standpoint  seemed  to 
be  able  to  defy  the  law.  The  Reading  Company  was  a 
pure  holding  company  owning  all  the  stock  of  the  Phila- 
delphia and  Reading  Railway  and  all  the  stock  of  the 
Philadelphia  and  Reading  Coal  and  Iron  Co.,  but  the 
railroad  had  no  legal  interest  whatever  in  the  coal  com- 
pany or  in  its  activities.  This  case  reached  the  court 
in  I92O1  and  the  decision  is  emphatic.  It  sweeps  aside 
technicalities  and  comes  directly  to  the  heart  of  the 
problem.  Having  reached  the  conclusion  that  the  de- 
liberately calculated  purchase  for  control  by  a  holding 
company  of  competing  railroads  and  coal  companies  is  a 
violation  of  the  Anti-Trust  Act,  it  declares  that  the  com- 
bination of  railroad  and  coal  company  through  a  hold- 
ing company  must  cease  because  it  is  a  violation  of  the 
commodities  clause.  In  connection  with  another  phase 
of  the  case,  the  relation  of  the  Central  of  New  Jersey, 
itself  a  subsidiary  of  the  Reading,  to  its  coal  company, 
1 253  U.  S.,  26. 


58  RAILROADS  AND  GOVERNMENT 

the  court  goes  to  the  root  of  the  matter  in  a  manner 
reminiscent  of  the  New  York  Supreme  Court  in  the  Sugar 
Trust  Case  back  in  1890.  It  declares  that  when  the 
ownership  of  a  mining  company  by  a  railroad  is  not  for 
the  purpose  of  normal  participation  as  stockholder,  but 
to  make  it  a  mere  instrumentality,  the  courts  will  look 
through  the  form  to  the  realities  of  the  relation  as  if  the 
corporate  agency  did  not  exist.  Apparently  what  the 
country  has  needed  is  not  additional  legislation  but  clear 
vision  and  courage  on  the  part  of  the  Supreme  Court. 

In  this  long-drawn-out  court  controversy  the  Com- 
mission took  no  active  part,  but  its  influence  was  con- 
stantly in  the  direction  of  clarifying  the  issue,  and  it  had 
many  opportunities  to  express  its  view  in  cases  before  it. 
In  the  investigation  of  the  relations  of  railroads  and 
coal  mines  in  Illinois  made  at  the  instance  of  Congress 
in  1914,*  it  reached  the  conclusion  that  public  and  pri- 
vate business  should  be  clearly  separated,  that  credit 
should  not  be  extended  by  railroads  to  private  industry, 
and  that  the  commodities  clause  should  be  enforced  and 
extended  to  all  traffic.  In  1915  in  an  investigation  of 
anthracite  coal  rates2  it  laid  stress  upon  the  inherent 
unlawfulness  of  rates  and  practices  that  were  the  out- 
growth of  past  conditions  in  which  carriers  were  produc- 
ers, shippers,  transporters,  and  venders  of  coal.  Again 
in  the  same  year  the  Commission  investigated  the  rates 
governing  the  transportation  of  railroad  fuel  and  other 
coal.3  After  laying  down  the  principle  that  the  carrier 
was  entitled  as  shipper  to  the  same  consideration  as  any 
commercial  shipper,  but  to  no  more,  even  when  the  ship- 
ment moved  partly  over  its  own  rails,  the  Commission 
called  attention  to  the  fact  that  some  carriers  had  not 
complied  with  this  often-reiterated  principle,  and  an- 
nounced that  the  next  case  of  this  sort  would  proceed 
under  the  criminal  provisions  of  the  Act. 

'31  I.  C.  C,  193.  1 35  I.  C.  C,  220.  !  36  I.  C.  C,  i. 


ADMINISTRATIVE  ACTIVITIES  59 

3.     Express  Rates 

In  response  to  repeated  and  wide-spread  complaints, 
the  Commission  in  1912  undertook  a  comprehensive  sur- 
vey of  the  rates  and  practices  of  the  express  companies. 
It  found  that  their  practices  were  unjustifiable,  that 
their  methods  of  doing  business  were  archaic,  and  that 
their  rates  were  discriminating  and  unreasonable.  It 
thoroughly  overhauled  and  reformed  express  company 
methods.  It  established  for  the  first  time  through  routes 
and  joint  rates  and  eliminated  the  through  charge  that 
had  been  constructed  out  of  the  sum  of  the  local  rates. 
It  put  a  stop  to  the  criminal  practice  of  the  double  col- 
lection of  charges.  Moreover,  it  worked  a  complete 
revolution  in  the  methods  of  rate  computation  by  divid- 
ing the  country  into  zones  and  blocks  and  devising  a 
system  of  class  rates  in  connection  therewith.  This 
system  of  rate  making,  which  simplifies  the  tariffs  for 
both  the  companies  and  the  public,  may  be  set  down  as 
the  most  important  piece  of  constructive  rate  making 
that  the  Commission  has  accomplished.1  It  has  now  been 
adopted  for  intra-state  traffic  by  practically  all  the  states2 
and  is  being  gradually  extended  to  include  commodity 
tariffs  as  well  as  class  rates. 

4.    Mail  Pay 

Later,  the  Commission  had  thrust  upon  it  the  duty  of 
determining  the  proper  payment  for  the  carriage  of  the 
mails.  This  is  a  question  which  has  from  time  to  time 
occupied  the  political  stage.  Rates  of  pay  based  upon 
weight  of  mail  and  distance  carried  and  upon  equipment 
furnished  in  the  form  of  mail  cars,  had  been  prescribed 

^4  I.  C.  C.,  380;  28  I.  C.  C.,  131. 

1  Effective  January  i,  1919,  the  Director-General  adopted  the  block 
system  for  the  three  states  that  had  not  theretofore  adopted  it.  (Gen- 
eral Order  No.  56.) 


60  RAILROADS  AND  GOVERNMENT 

by  Congress  as  far  back  as  1873.  Reductions  in  these 
rates  had  taken  place  by  Congressional  action  in  1876, 
1878,  and  in  1907,  and  from  time  to  time  through  change 
in  administrative  regulation  and  interpretation. 

Intermittently,  the  question  of  pay  arose  in  Congress. 
It  was  the  contention  of  the  railroads  that  not  only  were 
the  rates  not  exorbitant,  but,  because  pay  was  based 
upon  the  results  of  weighings  that  took  place  but  once 
in  four  years,  the  railroads,  due  to  the  increase  in  mail 
matter,  were  actually  carrying  before  the  succeeding 
weighing  more  weight  than  they  were  being  paid  for. 
Congressional  investigations  followed  one  another  and 
resulted  in  the  accumulation  of  much  interesting  data 
but  in  little  or  no  action.  The  situation  had  from  the 
first  been  rendered  more  difficult  because  of  the  ammuni- 
tion that  the  subject  provided  for  the  political  orator, 
and  because  various  postmasters-general  found  it  of  ad- 
vantage to  attempt  to  balance  their  accounts  and  avoid 
a  deficit  by  cutting  off  something  from  the  railroad  com- 
pensation. 

With  the  introduction  of  the  parcel  post  in  1913  the 
problem  became  more  complicated  and  the  issue  was 
brought  to  a  head.  The  weight  basis  of  payment  seemed 
now  no  longer  to  meet  the  situation  satisfactorily  and  it 
was  clear  that  the  compensation  to  the  railroads  was 
inadequate.  The  joint  Congressional  committee  that 
reported  in  1914  (the  Bourne  committee)  held  that  the 
railroads  were  entitled  to  an  increase  in  compensation 
but  recommended  a  shift  to  the  space  basis  of  payment. 
The  railroads  desired  to  continue  the  weight  basis  with 
annual  weighings.  By  the  Act  of  July  28,  1916,  the 
Interstate  Commerce  Commission  was  directed  to  pre- 
scribe the  basis  and  amount  of  compensation  for  mail 
carriage  and  the  services  to  be  performed  in  connection 
therewith.  The  Postmaster- General  was  authorized, 
with  the  consent  of  the  Commission,  to  put  into  effect 


ADMINISTRATIVE  ACTIVITIES  6 1 

experimentally,  to  the  extent  he  deemed  necessary,  the 
space-basis  system  of  pay  at  the  rates  provided  in  the 
Act  of  Congress.  Reports  were  to  be  made  and  hearings 
conducted  following  the  experiment.  Accordingly,  on 
November  i,  1916,  the  Postmaster-General  introduced 
the  space  basis  on  practically  all  roads  in  the  country. 
Following  the  experiment  and  the  hearings,  the  Commis- 
sion rendered  its  opinion  on  December  23,  igig,1  in  which 
it  approved  the  space  basis  of  payment  and  required  its 
introduction  on  all  mail  routes  after  March  i,  1920.  It 
prescribed  rates  for  the  different  classes  of  service,  in- 
creasing the  rates  then  in  effect,2  discontinued  certain 
terminal  allowances,  and  required  that  certain  auxiliary 
services  should  be  paid  for  separately  at  cost.  It  is  to 
be  hoped  that  this  thorny  question  has  at  last  been  elimi- 
nated from  politics,  and  that  mail  rates,  like  all  other 
transportation  rates,  may  hereafter  be  a  matter  solely  of 
administrative  regulation. 

5.     Accounting 

Section  20  of  the  Act  to  Regulate  Commerce,  under 
which  the  statistical  and  accounting  activities  of  the 
Commission  have  been  developed,  has  attracted  relatively 
little  public  interest,  and  its  importance  and  influence  in 
the  problems  of  regulation  has  been  largely  overlooked. 
In  fact,  for  many  years  the  Commission  itself  set  little 
store  by  the  work  of  its  statistical  division,  and  it  is  only 
within  the  last  decade  that  the  significance  of  accounts 
and  statistics  has  been  adequately  appreciated  within 
the  offices  of  the  Commission  itself. 

This  is  in  part  to  be  explained  by  the  slowness  with 
which  uniform  statistics  and  accounts  have  been  de- 
veloped, the  delay  being  due  in  the  first  instance  to  the  in- 

1 56  I.  C.  C.,  i. 

2  The  average  rate  increase  for  1918  and  subsequent  periods  over 
the  rates  prescribed  by  Congress  in  1916  was  65  per  cent. 


62  RAILROADS  AND   GOVERNMENT 

adequacy  of  the  legislation,  and,  when  this  was  corrected, 
to  the  gigantic  size  of  the  job — the  necessity  of  working 
out  detailed  accounting  regulations  and  classifications 
for  all  the  varied  transportation  agencies  subject  to  the 
Act.  It  was  only  when  these  preliminary  tasks  were 
completed  and  the  results  began  to  come  in  that  the 
Commission,  and  later  the  public,  began  to  be  aware 
of  their  value  from  the  regulation  standpoint.  To  cite 
but  one  instance:  The  contracts  under  which  the  Gov- 
ernment took  over  the  roads  during  the  war  would  have 
been  greatly  delayed  and  seriously  complicated  but  for 
the  uniform  accounting  system  which  made  it  a  relatively 
simple  matter  to  determine  for  each  road  its  "average 
annual  railway  operating  income  for  the  three  years 
ending  June  30,  1917." 

In  the  original  Act  of  1887  carriers  were  required  to 
file  annual  reports  with  the  Commission  and  the  items 
were  specified.  Blanks  were  provided  and  classifications 
of  certain  general  accounts  were  issued  in  co-operation 
with  the  roads,  in  the  hope  that  this  might  aid  in  the 
promotion  of  uniformity.  But  these  classifications  could 
not  be  ordered  into  force.  The  carriers  were  merely 
requested  to  adopt  them.  Accordingly,  while  the  sta- 
tistical compilations  made  from  these  reports  steadily 
improved  in  content  and  quality,  they  did  not  inspire 
confidence  with  respect  to  significant  items,  because  the 
carriers  were  free  to  report  or  not  as  they  saw  fit.  An 
attempt  on  the  part  of  the  Commission  to  compel  answers 
to  certain  questions  led  to  a  ruling  by  the  Supreme  Court 
that  in  view  of  the  lack  of  penalties  and  of  enforcement 
provisions,  no  suit  could  be  maintained  to  compel  the 
furnishing  of  information  refused  in  the  annual  reports.1 

This  situation  was  corrected  by  the  amendments  of 
1906,  which  required  reports  under  oath,  prescribed  pen- 
alties for  the  violation  of  the  Commission's  regulations, 
1 197  U.  S.,  536,  (1905). 


ADMINISTRATIVE  ACTIVITIES  63 

and  established  a  mandamus  process  for  enforcing  its 
orders.  The  original  Act  had  provided  that  the  Com- 
mission might  in  its  discretion  prescribe  a  uniform  system 
of  accounts  for  all  carriers  subject  to  its  jurisdiction.  It 
was  now  furnished  with  a  force  of  examiners  having  au- 
thority to  inspect  the  accounts  and  records  of  the  carriers. 
Immediately  upon  the  passage  of  these  amendments, 
the  Commission,  in  co-operation  with  accounting  officers 
of  the  carriers,  began  the  formulation  of  systems  of  ac- 
counts for  the  various  transportation  agencies,  beginning 
with  steam  railroads.  Three  classifications — those  of 
operating  expenses,  operating  revenues,  and  road  and 
equipment  expenditures  for  steam  roads — were  completed 
and  put  into  effect  on  July  i,  1907.  By  1915  uniform 
systems  of  accounts  had  been  prescribed  for  each  class 
of  carriers  subject  to  the  Act,  and  it  was  the  opinion  of 
the  Commission  that  no  extensive  revision  of  these  classi- 
fications would  be  required  for  some  years  to  come. 
These  prescribed  accounts  covered  steam  and  electric 
roads,  water  carriers,  express,  pipe-line,  sleeping  car, 
telephone,  and  telegraph  companies.  The  importance 
of  uniformity  in  accounting  in  these  public-service  indus- 
tries and  the  increased  value  of  reports  based  upon  uni- 
form accounting  can  hardly  be  overestimated.  Whether 
looked  at  from  the  standpoint  of  investor,  of  shipper,  of 
regulating  authority,  of  the  general  public,  publicity  of 
uniform,  intelligible,  comparable  information  is  invaluable. 
But  in  order  to  perfect  the  value  of  this  service  a  thor- 
ough and  continuous  inspection  was  absolutely  neces- 
sary. Rules  and  regulations  were  capable  of  honest 
misconception.  The  exercise  of  individual  judgment 
might  destroy  the  uniformity  sought  for.  There  were 
abundant  opportunities  for  deliberate  misstatement  of 
earnings  and  expenses  or  for  a  manipulation  of  property 
accounts  if  the  books  were  not  personally  inspected  by 
agents  of  the  Government.  While  cases  of  flagrant  vio- 


64  RAILROADS  AND   GOVERNMENT 

lation  of  accounting  regulations  have  been  rare  and  most 
of  the  roads  have  readily  complied  with  requirements, 
yet  the  perfection  desired  is  not  attainable  without  ade- 
quate inspection.  It  is  more  than  likely  that  many  of 
the  cases  of  mismanagement  of  transportation  companies 
in  the  past  would  have  been  impossible  had  the  account- 
ing system  with  its  corps  of  examiners  been  working 
with  complete  efficiency.  Such  inspection  has  never  yet 
been  completely  satisfactory,  due  to  the  fact  that  the 
various  special  investigations  which  the  Commission  has 
felt  called  upon  to  make  either  on  its  own  initiative  or 
on  that  of  Congress  have  drafted  the  services  of  ex- 
aminers, and  diverted  them  from  the  specific  object  of 
their  appointment. 

Two  types  of  deliberate  violation  of  accounting  rules 
may  be  mentioned  as  the  most  important  and  most  fre- 
quently recurring  offenses.  The  one  has  to  do  with  the 
overstatement  or  understatement  of  operating  expense, 
which  can  usually  be  accomplished  in  connection  with 
maintenance.  An  overstatement  makes  the  net  earnings 
appear  smaller  than  they  actually  are,  and  thus  creates  a 
secret  reserve  of  property  value  which  appears  nowhere 
on  the  books,  but  which  may  be  dragged  forth  at  a  favor- 
able moment  for  speculative  purposes.  An  understate- 
ment of  operating  expense  develops  fictitious  earnings  and 
a  fictitious  surplus  which  furnish  an  excuse  for  additional 
securities.  In  such  cases  accounting  is  no  longer  a  record 
of  financial  transactions  but  merely  a  reflection  of  corpo- 
rate policy. 

But  it  is  in  the  property  account  that  the  greatest 
manipulation  has  taken  place,  in  the  item  of  "cost  of 
road  and  equipment."  A  clear-cut  distinction  between 
operating  expenditures  and  expenditures  for  property 
was  recognized  by  the  Commission  as  fundamental.  In 
its  classification  of  expenditures  for  road  and  equipment 
in  1907,  it  laid  down  the  rule  that  all  entries  under  this 


ADMINISTRATIVE  ACTIVITIES  65 

head  must  be  in  terms  of  cash,  thus  showing  what  the 
investment  actually  cost.  There  have  been  frequent 
severe  criticisms  of  the  property  accounts  of  the  carriers, 
some  of  which  have  gone  to  the  extreme  of  declaring 
them  to  be  worthless.  These  criticisms  are  in  many 
instances  well  founded  so  far  as  the  accounts  previous 
to  1907  are  concerned.  Items  carried  on  the  books  as 
investments  or  specifically  included  in  the  term  "cost 
of  road,"  when  subjected  to  close  analysis,  reveal  such 
doubtful  elements  as  "vest-pocket"  construction  charges, 
cost  of  preliminary  and  imaginary  surveys,  promotion 
expenses,  valuations  hoped  for  but  not  yet  realized,  se- 
curities of  subsidiary  corporations  which  are  often  only 
evidences  of  possession  but  are  carried  on  the  books  at 
par.  Since  1907,  if  the  regulations  of  the  Commission 
have  been  observed,  all  entries  have  represented  cash 
expenditure,  and  the  railroads  are  justified  in  pointing 
to  this  fact  as  evidence  that  their  property  accounts 
are  growing  steadily  more  acceptable,  and  that  they  now 
contain  a  large  element  of  investment  that  has  been  offi- 
cially approved. 

But  here  again,  in  order  that  this  contention  should 
be  wholly  acceptable,  it  is  necessary  either  that  the  car- 
riers should  universally  and  voluntarily  obey  the  regula- 
tions of  the  Commission,  or  that  the  Commission's  system 
of  inspection  should  be  perfect.  And  neither  alterna- 
tive is  wholly  true.  Some  unfortunate  and  glaring  in- 
stances of  violation  of  accounting  regulations  have  been 
uncovered  from  time  to  time.  Heretofore,  however, 
departures  from  the  regulations  have  been  corrected  as 
far  as  possible  by  correspondence.  Only  two  questions 
have  been  taken  to  the  courts,  and  in  both  of  them  the 
Commission  has  been  sustained.  The  one  involved  the 
right  of  the  Commission  to  require  reports  from  water 
carriers  and  to  exercise  accounting  jurisdiction  over  them.1 
1 1.  C.  C.  v.  Goodrich  Transit  Co.,  224  U.  S.,  194 


66  RAILROADS  AND  GOVERNMENT 

This  case  was  significant  because  the  court  at  the  same 
time  sustained  the  constitutionality  of  Section  20,  and 
thereby  rendered  secure  the  authority  of  the  Commis- 
sion over  accounts  and  reports.  The  other  case  in- 
volved technical  questions  of  accounting,1  the  recording 
of  transactions  in  connection  with  the  abandonment  of 
property  and  the  substitution  of  improvements.  It  is 
a  significant  recognition  of  the  finality  of  the  adminis- 
trative power  of  the  Commission  that  the  court  in  this 
case  refused  to  interfere  with  the  Commission's  regula- 
tions notwithstanding  the  fact  that  it  was  strongly  im- 
pressed by  the  arguments  of  railroad  counsel.  The 
court  refused  to  set  its  judgment  above  that  of  the  Com- 
mission. 

In  its  discussion  of  the  accounting  delinquencies  of 
the  Puget  Sound  Railway2  in  1914  the  Commission  ad- 
mitted that  it  had  been  lenient  with  the  carriers  during 
the  formative  period.  But  now  that  the  accounting  sys- 
tem was  complete  and  the  various  questions  involved  in 
its  introduction  largely  disposed  of,  the  Commission 
proposed  thereafter  to  invoke  the  penalties  of  the  law  for 
infraction,  and  to  hold  the  chief  accounting  officer  strictly 
responsible  for  his  signature  under  oath  attached  to  the 
report  to  the  Commission.  Moreover,  said  the  Com- 
mission: "We  shall  not  hesitate  to  call  to  account  with 
even  greater  severity  anyone  above  the  accounting  officer 
in  authority  who  may  share  in  the  responsibility  for  any 
violations  of  the  accounting  rules  and  regulations  which 
have  been  prescribed  for  the  use  of  the  carriers  that  are 
subject  to  the  Act." 

Among  the  unsettled  accounting  problems  the  most 
important  is  that  of  depreciation.  It  is  obvious  that  net 
earnings  are  not  correctly  stated  if  adequate  charges  are 
not  made  in  the  operating  expense  accounts  to  cover 

1  Kansas  City  Southern  Ry.  v.  U.  S.,  231  U.  S.,  423  (1913). 
*  St.  Paul  and  Puget  Sound  Accounts,  29  I.  C.  C.,  508  (1914). 


ADMINISTRATIVE  ACTIVITIES  67 

depreciation  of  property.  There  has  been  much  dis- 
cussion as  to  whether  and  to  what  extent  depreciation 
actually  obtains  in  the  railroad  business,  many  insisting 
that  an  adequate  scheme  of  renewals  renders  reserves 
for  depreciation  altogether  unnecessary.  It  is  not  the 
purpose  to  enter  upon  this  technical  discussion  here.  It 
is  clear  that  the  Commission's  accountants  never  took 
that  position,  for  provision  was  made  in  the  classification 
of  operating  expenses  in  1907  for  depreciation  on  equip- 
ment. No  experience  was  available  upon  which  to  base 
depreciation  rates,  neither  was  the  Commission  clear  as 
to  its  power  definitely  to  prescribe  rates.  Accordingly, 
the  roads  were  required  to  charge  the  actual  deprecia- 
tion, the  rate  being  left  to  the  determination  of  the  individ- 
ual carrier.  The  practice  varied  all  the  way  from  charging 
nothing  up  to  a  charge  of  7  per  cent,  the  variations  being 
due  not  to  actual  differences  in  physical  depreciation  but 
rather  to  differences  in  financial  policy.  Many  roads,  as 
already  stated,  felt  that  depreciation  was  adequately 
covered  by  renewals.  Many  made  undercharges  or 
overcharges  with  larger  financial  policies  in  mind.  The 
regulations  of  the  Commission  served  merely  to  reveal 
the  corporate  practices  of  the  carriers  and  developed  no 
uniformity  in  depreciation  accounting. 

In  the  revised  classifications  of  1914  provision  was 
made  for  depreciation  of  fixed  property  as  well  as  equip- 
ment. By  1916  the  Commission  was  becoming  more 
insistent  that  some  rate  of  depreciation  should  be  em- 
ployed, and  was  ordering  corrections  when  rates  appeared 
excessive  or  inadequate.  But  up  to  the  passage  of  the 
Act  of  1920  no  specific  rate  was  required.  The  Commis- 
sion contented  itself  with  ordering  that  each  carrier  should 
charge  a  rate  based  upon  its  own  experience  which  it 
should  be  prepared  to  justify. 

The  practicability  of  applying  the  methods  of  cost 
accounting  to  railroad  operations  has  been  a  subject  of 


68  RAILROADS  AND   GOVERNMENT 

much  discussion  inside  and  outside  the  Commission. 
In  the  railroad  industry  it  takes  the  special  form  of  the 
separation  of  operating  expenses,  mainly  between  the 
two  services  of  freight  and  passenger.  It  has  been  the 
commonly  accepted  view  that  railroad  services  were  in  a 
sense  the  product  of  joint  cost,  that  the  one  plant  served 
its  various  uses,  and  that  any  attempt  to  assign  expenses 
to  specific  services  could  be  accomplished  only  in  so  arbi- 
trary and  crude  a  fashion  that  the  results  would  be  value- 
less. Certain  expenses  might  of  course  be  definitely 
assigned,  those,  specifically  relating  to  train  operation, 
but  maintenance  of  way  and  general  expenses  were  prac- 
tically unassignable.  And  the  theory  of  rates  based 
upon  this  survey  of  conditions  was  that  of  charging  ac- 
cording to  the  value  of  the  service,  each  shipment  to  con- 
tribute to  joint  costs  roughly  in  proportion  to  its  ability. 
On  the  other  hand,  those  who  lean  in  the  direction  of 
the  more  extensive  application  of  the  cost  basis  of  rate 
making  have  argued  that  there  is  no  reason  why  the 
developments  in  the  science  of  cost  accounting  should 
not  be  applied  to  railroads  as  well  as  to  other  industries, 
that  from  66  to  70  per  cent  of  the  operating  expenses 
can  be  assigned  in  a  fairly  satisfactory  manner,  and  that 
this  result  would  be  of  distinct  assistance  to  the  Com- 
mission in  adjudicating  rate  problems,  by  helping  to 
determine  the  cost  of  specific  services,  and  to  study 
intelligently  comparative  costs  on  different  railroads. 
Roads  should  be  in  position  to  know,  at  least  in  a  general 
way,  what  traffic  was  producing  the  largest  profits  and 
what  traffic  was  being  carried  below  cost.  To  the  con- 
tention of  this  group  that  a  large  number  of  roads  were 
already  making  this  separation  for  their  own  purposes, 
and  so  would  not  be  burdened  seriously  if  required  to  do 
it  for  the  Commission,  the  railroad  accountants  replied 
that  so  long  as  the  basis  of  separation  was  the  same  from 
year  to  year  and  the  results  reached  were  used  only  for 


ADMINISTRATIVE  ACTIVITIES  69 

comparative  purposes,  the  separation,  however  arbitrary, 
might  be  useful  to  a  road  for  operating  purposes.  But  it 
would  not  stand  the  test  of  scientific  analysis  and  should 
have  no  official  recognition. 

Separation  had  been  attempted  at  the  very  beginning 
of  the  Commission's  history  but  was  abandoned  in  1894, 
because  largely  arbitrary  and  useless.  The  question 
was  resurrected  in  1914  and,  following  elaborate  hearings, 
the  Commission  decided  that  all  Class  I  roads  (those 
having  annual  gross  earnings  of  over  $1,000,000)  should 
separate  their  operating  expenses  according  to  certain 
prescribed  bases.1  By  an  order  effective  July  i,  1915, 
separation  was  required  of  all  expenses  except  certain 
items  of  maintenance  of  way.  However,  the  war  came 
before  the  system  had  reached  a  stage  of  effectiveness, 
and  the  necessity  of  reducing  accounting  work  to  the 
minimum,  because  of  shortage  of  labor,  led  to  the  sus- 
pension in  1917  of  all  requirements  for  the  apportion- 
ment of  expenses. 

6.     Valuation 

This  second  decade  of  the  twentieth  century  will  be 
significant  in  railroad  history  because  of  the  inaugura- 
tion of  one  of  the  most  important  surveys  ever  under- 
taken in  this  country,  that  of  the  valuation  of  the  rail- 
roads. While  the  decade  has  not  seen  its  consummation, 
it  has  witnessed  all  the  preliminary  and  underlying  in- 
vestigations and  the  settlement  of  fundamental  princi- 
ples upon  which  the  structure  is  being  speedily  erected. 
When  the  idea  of  a  sweeping  federal  valuation  was  first 
suggested,  it  met  with  terrified  opposition  from  the  rail- 
roads. It  was  declared  to  be  prohibitive  in  cost.  It 
would  be  out  of  date  long  before  its  completion,  and  in 
any  case  it  was  an  absurd  waste  of  time  and  money  be- 

1  In  the  matter  of  the  Separation  of  Operating  Expenses.  30  I.  C.  C. 
676  (1914). 


70  RAILROADS  AND   GOVERNMENT 

cause  valuation  had  no  relation  to  rate  making.  Yet 
as  railroad  managers  considered  the  question  more  care- 
fully, their  instinctive  opposition  disappeared  and  they 
saw  many  advantages  to  be  gained  from  a  definitive, 
officially  indorsed  property  valuation.  For  one  thing, 
the  bogie  of  overcapitalization  would  be  laid  once  for 
all,  for  they  were  confident  that  a  valuation  would  reveal 
property  value  in  excess  of  outstanding  securities.  More- 
over, for  their  own  uses  there  was  much  to  be  gained 
from  a  thorough  overhauling  of  their  domestic  accounts. 
It  was  a  costly  process,  but  it  needed  to  be  done,  and  this 
would  provide  the  stimulus.  Accordingly,  when  the 
Valuation  Act  was  finally  put  through  in  1913,  there  was 
practically  no  opposition  from  railroad  men.  Execu- 
tives confined  their  activities  to  suggestions  for  making 
the  valuation  as  comprehensive  and  as  thorough  as  pos- 
sible. 

There  is  not  opportunity  here  to  treat  this  question 
thoroughly.  It  involves  technical  considerations  that 
demand  a  separate  handling.  It  will  be  sufficient  to 
summarize  the  law  and  the  procedure  of  the  Commission 
thereunder  and  make  clear  its  position  in  the  present 
scheme  of  regulation.  By  the  Valuation  Act1  the  Com- 
mission was  required  to  report  the  value  of  all  property 
owned  or  used  by  every  common  carrier  subject  to  the 
Interstate  Commerce  Act.  It  was  to  report  for  each 
piece  of  property  the  original  cost  to  date,  the  cost  of 
reproduction  new,  the  cost  of  reproduction  less  depre- 
ciation, and  "other  values  and  elements  of  value,  if 
any."  Lands  were  to  be  reported  separately,  and  the 
amount  and  value  of  land  grants  or  donations  were  to 
be  ascertained  as  well  as  the  benefits  derived  from  their 
sale.  Railroads  were  required  to  aid  the  Commission 
by  furnishing  maps,  profiles,  contracts,  and  any  other 
pertinent  documents  and  to  co-operate  in  any  way  de- 
1  Interstate  Commerce  Act,  Sec.  iga,  March  i,  1913. 


ADMINISTRATIVE  ACTIVITIES  71 

sired  in  the  undertaking.  Provision  was  to  be  made  by 
accounting  regulations  and  reports  for  revision  and  cor- 
rection of  the  valuation  to  keep  it  up  to  date.  After  a 
tentative  valuation  had  been  completed,  notice  was  to 
be  given  to  the  Attorney- General  of  the  United  States, 
to  the  Governor  of  any  state  involved,  and  to  the  carrier, 
and  if  no  protest  was  made  within  thirty  days,  the  valua- 
tion was  to  become  final.  If  protested,  hearings  were  to 
be  held  before  final  valuation  was  announced.  All  final 
valuations  were  to  be  prima  facie  evidence  of  the  value  of 
the  property  in  all  proceedings  under  the  Act. 

The  Commission  proceeded  promptly  to  the  organiza- 
tion of  its  Bureau  of  Valuation,  placing  at  its  head  Judge 
Charles  A.  Prouty,  whose  long  and  brilliant  career  as  a 
member  of  the  Commission  had  qualified  him  admirably 
for  this  intricate  and  path-breaking  task.  The  work 
fell  naturally  into  three  divisions:  the  field  survey, 
the  accounting  and  statistical  computations,  and  the 
land  value  section.  The  first  was  largely  an  engineering 
problem,  having  to  do  with  a  census  of  standardized 
units.  The  second  accumulated  price  data  and  applied 
it  to  the  results  of  the  field  survey.  Likewise  it  was  con- 
cerned with  values  derived  from  records  as  distinct  from 
those  obtained  by  observation.  The  land  question  had 
a  sufficient  number  of  knotty  problems  to  warrant  its 
assignment  to  a  separate  division.  Alongside  the  Com- 
mission organization,  which  was  national  in  scope,  went 
the  valuation  departments  of  the  individual  roads  that 
accumulated  the  data  and  documentary  material  re- 
quired by  the  Commission  and  assisted  and  checked  the 
results  of  the  Commission's  engineers.  In  this  way  a 
physical  appraisal  could  be  agreed  upon  that  would  ma- 
terially expedite  the  process  of  reaching  a  final  valuation. 

The  Commission  began  its  work  by  selecting  a  few 
roads  in  different  sections  of  the  country  which  were  small 
and  possessed  of  varying  characteristics,  and  in  which 


72 


RAILROADS   AND  GOVERNMENT 


the  records  were  available,  in  order  to  uncover  and  dis- 
pose of  the  various  controversial  points  at  the  beginning, 
and  thereby  be  enabled  to  apply  a  standardized  prac- 
tice to  the  carriers  as  a  whole.  Gradually  the  forces 
were  increased  and  efficiency  developed  until  the  survey 
division  was  covering  a  little  over  50,000  miles  of  road 
annually.  Field  work  is  now  practically  completed  and 
the  field  forces  have  been  disbanded.  The  latest  figures 
(of  September  1921)  show  150  tentative  valuations  served 
upon  carriers.  In  the  case  of  several  of  these  properties, 
all  preliminary  reports  have  been  published  but  the  Com- 
mission has  not  yet  fixed  a  single  sum  as  the  final  value 
for  any  one  of  the  properties.  Action  in  this  direction 
was  suspended  and  delayed  by  an  adverse  decision  of 
the  Supreme  Court  that  required  the  Commission  to 
take  into  account  certain  matters  relating  to  condem- 
nation costs  which  the  Commission  had  omitted.1 

The  decision  of  the  Commission  to  find  a  single  sum  as 
a  final  value  for  each  road  compels  it  to  reach  a  final 
conclusion  on  the  many  complex  questions  involved  and 
to  find  the  truth  in  the  many  conflicting  theories.  Hav- 
ing found  original  cost  to  date,  the  actual  investment, 
the  cost  of  reproduction  new  and  less  depreciation,  the 
Commission  must  in  the  end  announce  the  value,  and  it 
is  the  reasoning  upon  which  this  value  will  be  based  that 
will  be  of  the  greatest  public  interest.  It  is  obvious  that 
there  is  no  rule  by  which  such  a  value  can  be  determined. 
It  must  in  the  end  be  a  matter  of  expert  judgment. 

In  the  matter  of  land  values,  which  perhaps  possesses 
the  greatest  interest  for  the  economic  student,  the  Com- 
mission is  required  to  find  the  original  cost  and  the  present 
value.  Its  rule  for  finding  present  value  of  common- 
carrier  lands  has  been  to  follow  Justice  Hughes  in  the 
Minnesota  Rate  Case,  and  to  estimate  it  from  the  present 
fair  average  market  value  of  adjoining  lands,  allowance 
1  Kans.  City  Southern  Case,  252  U.  S.,  178,  March  8,  1920. 


ADMINISTRATIVE  ACTIVITIES 


73 


being  made  for  any  peculiar  adaptability  of  the  land  to 
railroad  use,  but  nothing  being  added  for  expense  of 
acquisition  or  for  severance  damages.  The  reproduction 
cost  of  carrier  lands  has  not  been  estimated  nor  the  pres- 
ent cost  of  condemnation  and  damages,  or  of  purchase. 
It  was  this  last  omission  which  the  Supreme  Court  held 
to  be  contrary  to  the  mandate  of  the  statute. 

The  valuations  issued  by  the  Commission  and  still  con- 
sidered as  "tentative"  report  a  "final  value."  This  seems 
in  most  cases  to  be  the  cost  of  reproduction  less  depre- 
ciation for  the  depreciable  property,  together  with  the 
present  value  of  common-carrier  lands  and  the  working 
capital,  including  materials  and  supplies.  It  is  the  claim 
of  the  carriers  that  the  method  adopted  to  determine  de- 
preciation— the  straight-line  method  with  the  assignment 
of  different  service  lives  to  the  constituent  items  of  a 
carrier's  physical  property — does  not  determine  the  actual 
existing  depreciation  on  any  property,  but  only  the  esti- 
mated expiration  of  service  life  at  the  date  of  the  in- 
ventory. Hence  the  valuations  reported  contain  an  ex- 
cessive depreciation,  which  reduces  the  value  found  below 
the  actual  investment  value.  Again,  it  is  insisted,  the 
cost  of  reproduction  new  is  based  on  certain  theoretical  as- 
sumptions, and  many  items  of  cost,  actually  incurred  in 
the  construction  of  the  property  and  charged  on  the  books, 
have  been  omitted.  Moreover,  this  value  is  limited  to 
the  cost  of  bringing  the  property  into  existence  and  ready 
for  operation,  and  includes  nothing  for  later  development 
of  property  or  traffic.  Nothing  seems  specifically  to  be 
included  for  the  excess  cost  of  carrier  lands,  for  apprecia- 
tion of  property  or  for  the  element  of  which  the  railroad 
counsel  took  much  account,  going-concern  value.  In 
view  of  the  fact  that  the  Commission  has  omitted  much 
in  the  way  of  intangible  elements  that  the  railroads  claim, 
the  problem  of  valuation  is  not  likely  to  be  disposed  of 
promptly.  It  will  simply  be  transferred  to  the  courts. 


74  RAILROADS  AND   GOVERNMENT 

Yet  it  would  not  be  surprising  to  find  the  court  influenced 
to  a  considerable  degree  by  the  findings  of  the  Com- 
mission, and  somewhat  disinclined  to  set  up  its  own 
judgment  against  that  of  an  expert  administrative  body. 
It  is  more  than  likely  to  indorse  the  opinion  it  has  re- 
peatedly expressed  that  in  matters  within  its  adminis- 
trative discretion,  the  Commission's  judgment  is  final. 

Has  this  gigantic  undertaking  been  worth  while? 
What  place  will  the  results  occupy  in  the  field  of  regu- 
lation? We  hear  less  to-day  than  formerly  that  there 
is  no  relation  whatever  between  value  of  property  and 
rates,  that  the  railroad  must  charge  what  the  traffic  will 
bear,  and  that  whether  there  is  anything  left  as  a  return 
on  property  is  a  matter  to  be  determined  by  the  Board 
of  Directors  when  the  annual  report  is  made  up,  but 
does  not  primarily  concern  the  traffic  department.  This 
form  of  argument  never  was  true  except  to  a  limited  de- 
gree. Individual  rates  are,  no  doubt,  made  frequently 
with  little  consideration  for  their  ultimate  effect  upon  net 
revenues,  although  the  traffic  manager  must  always  have 
this  consideration  in  the  background.  But  when  an 
entire  schedule  of  rates  is  under  consideration,  the  one 
outstanding  question  is  that  of  an  adequate  return  upon 
railroad  investment.  The  tendency  to  advance  this  argu- 
ment to  the  fore  increased  steadily  after  the  decision  in 
Smyth  v.  Ames  in  1898,  in  which  the  court  declared  that 
what  the  carrier  was  entitled  to  was  a  reasonable  return 
upon  the  fair  value  of  the  property  devoted  to  public 
use.  As  the  carriers,  beginning  with  1910,  undertook 
in  co-operation  with  one  another  to  increase  entire  sched- 
ules of  rates  covering  extended  territories,  their  most 
effective  argument  was  not  a  demonstration  of  the  in- 
trinsic reasonableness  of  specific  rates,  but  rather  the 
fact  that  these  general  increases  were  necessary  to  give 
them  that  reasonable  return  on  their  investment  which 
was  assured  by  law.  These  tactics  had  the  advantage 


ADMINISTRATIVE  ACTIVITIES  75 

which  they  did  not  overlook,  of  disposing  of  the  cry 
that  the  railroads  were  seeking  dividends  on  an  inflated 
capitalization.  They  no  longer  asked  for  dividends. 
They  asked  for  the  fair  return  on  their  property.  This 
obtained,  dividends  would  come  or  not,  dependent  upon 
the  nature  and  extent  of  their  capital  securities.  This 
point  has  been  dwelt  upon  because  it  illustrates  the  grow- 
ing importance  of  the  property-value  concept  in  railroad 
regulation,  and  hence  the  importance  of  the  valuation 
survey  now  nearing  completion.  The  law  of  1913  was 
passed  none  too  soon  and  its  results  as  fast  as  available 
are  to  be  incorporated  into  the  structure  of  our  federal 
machinery.  This  is  evident  from  a  reading  of  the  Trans- 
portation Act  of  1920.  Smyth  v.  Ames  had  prescribed 
a  minimum  return  to  the  carrier,  a  reasonable  return 
upon  a  fair  value,  below  which  confiscation  would  ap- 
parently begin.  The  Act  of  1920  prescribes  a  maximum 
return  beyond  which  recapture  by  the  Government  is  to 
begin.  In  determining  what  rates  will  provide  the  re- 
turn on  property  prescribed  by  this  statute,  the  Com- 
mission is  to  utilize  the  results  of  the  valuation  so  far  as 
they  are  available,  and  where  final  value  has  been  ascer- 
tained, this  is  to  be  taken  by  the  Commission  as  the 
value  upon  which  the  carrier  is  entitled  to  earn.1  To 
the  utter  confusion  of  those  who  assert  that  there  is  no 
connection  between  value  of  property  and  rates,  Congress 
makes  property  value  the  sole  guide  in  determining  their 
reasonableness. 

Again  the  consolidation  clause  of  the  Act  of  1920  pro- 
vides that  the  capitalization  shall  not  exceed  the  value 
of  the  combined  properties  as  ascertained  by  the  Com- 
mission under  its  valuation  procedure.2  While  no  spe- 
cific mention  is  made  of  valuation  in  connection  with 
the  authority  granted  over  capitalization,  yet  the  dis- 
cretion granted  the  Commission  in  determining  the  sound- 

1 1.  C.  C.  Act,  Sec.  isa  (4).  2 1.  C.  C.  Act,  Sec.  5  (6b). 


76  RAILROADS  AND  GOVERNMENT 

ness  of  the  application  will  lead  it  without  doubt  to  con- 
sult its  valuation  records. 

Property  value  officially  determined  has  been  trans- 
formed from  the  dream  of  a  few  idealists  into  the  cor- 
ner-stone of  our  regulation  policy.  It  constitutes  the  ul- 
timate determinant  of  rates.  It  sets  the  limits  to  the 
financial  policy  of  consolidation  and  dampens  the  ardor 
of  the  financial  juggler.  It  will  be  a  substantial  aid  in  all 
future  capitalization.  Finally  its  influence  upon  rail- 
road accounting  should  be  healthy  and  far-reaching.  In 
the  accounting  problems  of  the  present,  such  for  example 
as  depreciation,  an  accurate  valuation  of  property  with 
all  the  historical  confusion  of  accounts  eliminated,  and  a 
systematic  method  of  keeping  this  valuation  abreast  of 
the  times  should  be  of  enormous  utility.  Anything  that 
contributes  to  the  soundness  and  scientific  exactitude  of 
accounting  increases  the  efficiency  of  public  regulation. 

7.     Safety  Measures 

Deserving  of  more  than  passing  mention  is  the  work  of 
the  Commission  in  the  interest  of  safe  travel.  It  takes  a 
wide  range,  including  such  varied  functions  as  the  award- 
ing of  life-saving  medals,  the  prescribing  of  rules  for  the 
safe  transportation  of  explosives,  the  enforcement  of  the 
limited  hours  of  service  of  employees  and  the  use  of  the 
various  standardized  devices  in  train  equipment. 

The  development  of  the  original  safety  appliances  and 
their  introduction  belong  to  the  first  decade  of  the  Com- 
mission's life.  By  1900  cars  and  locomotives  were  al- 
most universally  equipped  with  air-brakes  and  automatic 
couplers.  Since  that  time  one  device  after  another  has 
been  standardized  and  introduced,  such  as  grab-irons, 
handholds,  side  steps,  running-boards,  and  ash-pans.  In 
igio,  the  Commission  was  required  by  statute  to  desig- 
nate the  number,  dimensions,  location,  and  manner  of 
application  to  cars  of  the  various  appliances  provided 


ADMINISTRATIVE  ACTIVITIES  77 

for  by  previous  legislation,  which  indirectly  increased 
its  power  over  the  enforcement  of  the  laws.  As  an  aid 
to  enforcement  monthly  reports  of  accidents  were  re- 
quired. In  the  same  year,  Congress  conferred  upon  the 
Commission  authority  to  investigate  all  collisions,  de- 
railments, or  other  accidents  resulting  in  serious  injury 
to  persons  or  property.  Obviously  it  could  not  investi- 
gate all  accidents.  It  interpreted  the  law  as  a  mandate 
to  inquire  into  the  more  serious  cases,  with  the  object  of 
studying  causes  and  devising  measures  of  relief.  Its 
investigations  covering  a  decade  may  be  briefly  sum- 
marized. 

The  block-signal  system,  both  automatic  and  manual, 
has  been  slowly  extended,  by  no  means  as  rapidly  as  con- 
ditions of  service  have  demanded.  At  the  end  of  1920, 
38,000  miles  of  line  were  equipped  with  automatic  block 
signals  and  64,000  miles  with  non-automatic,  which 
means  that  considerably  more  than  half  of  the  mileage 
of  the  country  has  no  block  signals  at  all.  The  Com- 
mission has  from  time  to  time  urged  compulsory  legisla- 
tion but  the  expense  of  installation,  combined  with  the 
interferences  of  the  war  period,  has  resulted  in  leaving 
the  matter  to  the  voluntary  determination  of  the  indi- 
vidual carrier. 

The  failure  of  the  human  element  to  measure  up  to  its 
responsibilities  is  the  most  serious  factor  in  the  safety 
of  railroad  operation  to-day.  The  Commission  has 
recommended  that  the  operating  rules  be  standarized 
nationally  by  legislation.  This  would  remove  danger 
due  to  confusion  of  rules  on  different  railroads  and  mis- 
understandings arising  therefrom.  Of  course  obedience 
to  the  rules  would  not  follow  automatically.  To  ac- 
complish this,  reliance  must  be  placed  upon  the  develop- 
ment of  a  proper  spirit  upon  each  road.  And  in  fact  the 
decline  in  the  number  of  collisions  up  to  1916  was  due  not 
so  much  to  the  introduction  of  automatic  devices  to  pre- 


78  RAILROADS  AND  GOVERNMENT 

vent  them  as  to  the  setting  up  of  safety  committees  that 
have  performed  a  very  substantial  service  in  the  develop- 
ment of  a  greater  degree  of  responsibility  on  the  part  of 
the  personnel. 

The  alarming  increase  in  the  number  of  accidents  due 
to  derailments,  an  increase  from  6,697  in  1911  to  22,477 
in  1920,  has  led  the  Commission  to  the  conclusion  that 
size  and  weight  of  equipment  has  outrun  the  physical 
condition  of  track  and  roadway  and  that  efforts  must  be 
directed  to  restoring  the  balance.  In  the  matter  of 
equipment,  the  Commission  has  recommended  that  steel 
cars  be  required  in  passenger  service.  It  is  doubtful 
whether  legislation  would  in  any  way  alter  the  prevail- 
ing policy,  at  least  of  the  larger  roads,  which  are  substi- 
tuting steel  for  wooden  equipment  as  rapidly  as  circum- 
stances permit.  It  might  arouse  the  smaller  and  more 
impecunious  carriers  and  it  might  jog  the  others  to  a 
livelier  pace. 

It  is  of  interest  to  observe  that  the  Commission  in  its 
last  report  (1920)  asks  Congress  to  consider  the  advisa- 
bility of  prohibiting  by  statute  trespassing  on  trains  and 
tracks.  This  abuse,  which  is  responsible  for  40  per  cent 
of  the  deaths  in  railroad  accidents,  has  been  neglected  in 
national  legislation,  probably  because  it  was  considered 
to  fall  within  the  police  powers  of  the  states.  But  we 
are  moving  rapidly  away  from  the  separation  of  powers 
in  its  application  to  railroad  transportation.  Decisions 
under  the  safety-appliance  acts  which  have  sustained 
the  federal  power  are  evidence  of  the  trend.  Certain 
it  is  that,  having  emerged  from  our  pioneer  stage  of  na- 
tion-building, we  are  no  longer  justified  in  continuing  on 
our  happy-go-lucky  way  and  permitting  this  enormous 
abuse  to  continue.  , 

Failure  to  obey  signals  even  in  automatic-block-signal 
territory  has  developed  an  interest  in  inventions  that 
provide  for  automatic  stops  and  train  control.  Under 


ADMINISTRATIVE  ACTIVITIES  79 

a  congressional  resolution  of  1906  a  Block  Signal  and 
Train  Control  Board  was  appointed  which  conducted 
investigations  extending  over  a  period  of  four  years.  As 
a  result  it  reached  the  conclusion  that  automatic  train 
stops,  if  properly  installed  and  maintained,  would  con- 
tribute to  safety,  that  these  were  urgently  needed  in 
many  situations,  and  that  appliances  were  available  to 
meet  the  need.  However,  it  was  not  prepared  at  that 
time  (1911)  to  recommend  a  legislative  requirement  for 
the  use  of  automatic  stops.  This  action,  it  held,  should 
come  only  in  case  the  railroads  failed  to  show  diligence 
in  developing  this  aid  to  safety.  From  that  time  on 
nothing  was  done  by  the  steam  railroads  beyond  occasional 
experimenting.  The  automatic  stop  is  in  use  only  in 
subway  operation.  By  the  Transportation  Act  of  1920 
the  Commission  is  given  power  after  investigation  to 
order  any  railroad  to  install  automatic  or  train-control 
devices,  or  other  safety  devices  upon  any  part  of  its  rail- 
road, two  years'  notice  being  given.  A  broad  interpre- 
tation of  "other  devices"  would  seem  to  give  the  Com- 
mission authority  with  respect  to  every  type  of  safety 
provision  which  might  be  introduced  into  railroad  opera- 
tion. In  conformity  with  the  purpose  of  this  section, 
and  at  the  request  of  the  Commission,  a  joint  committee 
on  automatic  train-control  has  been  appointed  by  the 
American  Railway  Association,  consisting  of  representa- 
tives of  the  operating,  engineering,  signal,  and  mechanical 
divisions,  which  is  co-operating  with  the  Bureau  of  Safety 
in  more  extended  service  tests  of  automatic  devices  than 
have  heretofore  been  conducted.  Inspection  and  obser- 
vation has  thus  far  been  confined  to  short  stretches  of 
track  on  three  railroads,  the  Chicago  and  Eastern  Illinois, 
the  Chesapeake  and  Ohio,  and  the  Chicago,  Rock  Island 
and  Pacific.  The  committee  will  make  no  recommenda- 
tions until  a  device  has  stood  the  test  of  winter  conditions. 
The  requirement  laid  down  by  the  Commission  in  1909 


80  RAILROADS  AND  GOVERNMENT 

that  the  railroads  should  make  monthly  reports  of  viola- 
tions of  the  Hours  of  Service  Act1  was  contested  by  the 
roads  but  upheld  by  the  Supreme  Court.2  As  a  conse- 
quence the  Commission  has  been  in  position  to  analyze 
in  detail  the  causes  which  have  led  to  longer  hours  than 
the  law  permits  in  the  case  of  train  service  employees 
and  train  despatchers  and  operators,  and  through  such 
publicity  to  eliminate  many  unnecessary  situations. 
However,  prosecutions  in  small  number  still  continue,  and 
the  law  is  constantly  subject  to  examination  and  inter- 
pretation by  the  courts. 

1  Act  of  March  4,  1907,  34  Stat.  L.,  1415. 

2  221  U.  S.  612  (1911). 


CHAPTER  VI 

RELATIONS   OF   RAIL  AND   WATER  LINES 

THE  jurisdiction  of  the  Commission  over  water  lines 
has  always  been  reached  by  indirection,  through  its  power 
to  regulate  other  agencies. "  There  has  been  a  wide- 
spread conviction  that  water  transportation  in  general 
could  be  trusted  to  take  care  of  itself  without  any  injury 
to  the  public.  If  the  highway  were  free  to  all  vessels, 
competitors  would  force  the  rates  down  to  a  reasonable 
level.  It  is  curious  how  persistently  and  how  universally 
the  theory  has  held  in  the  face  of  conditions  that  were 
just  the  reverse  of  competitive.  Ownership  of  docks 
and  wharves  by  railroad  or  other  corporate  interests, 
ownership  of  boat  lines  by  railroad  companies,  singly  or 
in  combination,  has,  so  far  at  least  as  coastwise  and  lake 
transportation  is  concerned,  reduced  competition  be- 
tween water  and  rail  in  large  degree  to  mere  theory. 
Water  rates  have  been  fixed  at  a  level  lower  than  rail, 
but  the  differential  has  served  merely  to  express  the  differ- 
ence in  service.  This  adjustment  has  been  modified  from 
time  to  time  by  the  appearance  of  independent  water 
lines  but  the  altered  relationship  scarcely  ever  lasted  long. 
Sooner  or  later  these  lines  either  disappeared  or  "con- 
formed." 

What  should  have  been  done  at  the  very  beginning  of 
transportation  regulation  was  to  place  the  waterways 
directly  under  the  control  of  the  Interstate  Commerce 
Commission.  To  be  sure,  such  regulation  could  have 
been  only  partially  effective  so  long  as  the  Commission 
had  no  power  to  prescribe  minimum  rates,  and  so  could 
not  stabilize  the  rate  structure.  But  much  nevertheless 

81 


82  RAILROADS  AND  GOVERNMENT 

would  have  been  accomplished.  Instead  the  Congress  has 
clung  desperately  to  the  theory  of  competition,  and  has 
left  the  water  agencies  untouched  directly,  in  the  confi- 
dence that  they  voluntarily  would  serve  as  a  check  upon 
the  actions  of  their  railroad  rivals. 

The  original  Act  of  1887  gave  the  Commission  juris- 
diction over  common  carriers  engaged  in  the  transporta- 
tion of  passengers  or  property,  partly  by  railroad  and 
partly  by  water,  when  both  were  used  "  under  a  common 
control,  management  or  arrangement  for  a  continuous 
carriage  or  shipment."  This  covered  joint  water  and 
rail  rates,  applied  to  through  billing.  The  Commis- 
sion's interpretation  of  this  power  is  found  in  a  decision 
in  1909  in  which  it  held,  three  members  dissenting,  that 
water  carriers  were  subject  to  the  Act  only  in  respect  to 
such  traffic  as  was  handled  under  a  common  arrangement. 
Otherwise  they  were  free  of  all  jurisdiction.1  The  dis- 
senting commissioners  took  the  position  that  once  a 
water  carrier  had  entered  into  a  common  arrangement 
with  a  rail  carrier  all  of  its  business  was  subject  to  con- 
trol. They  regarded  the  decision  of  the  majority  as 
a  virtual  invitation  to  rail  carriers  to  provide  themselves 
with  water  connections  and  use  them  as  agencies  to  de- 
feat the  purpose  of  the  law.  It  is  to  be  noted  that  in 
1912  the  Supreme  Court  of  the  United  States  took  the 
view  of  the  minority,  so  far  as  it  applied  to  the  account- 
ing section  of  the  Act.  In  1910  the  Commission  had 
sent  out  a  circular  calling  for  statistics  from  every  water 
carrier  within  the  jurisdiction  of  the  Commission,  as  a 
basis  for  the  determination  of  the  proper  form  of  annual 
report  for  water  carriers.  Certain  water  carriers  refused 
to  answer  as  to  that  portion  of  the  report  that  did  not 
concern  joint  business  with  railroads.  The  Supreme 
Court  in  the  case  already  cited,2  required  complete  com- 
pliance on  the  general  ground  that  information  concern- 

1 15  I.  C.  C.f  205.  *  See  p.  65. 


RELATIONS  OF  RAIL  AND   WATER  LINES  83 

ing  all  the  transactions  of  these  carriers  was  necessary 
if  the  Commission  was  properly  to  regulate  matters  within 
its  jurisdiction,  that  Section  20  of  the  Act  conferred 
this  authority,  and  that  the  power  then  granted  did  not 
exceed  the  constitutional  authority  of  Congress.  Fol- 
lowing this  opinion,  water  lines  generally  complied  with 
the  Commission's  request  and  expressed  willingness  to 
co-operate  in  working  out  the  details  of  an  accounting 
system  and  an  annual  report. 

A  very  definite  step  was  taken  to  increase  the  jurisdic- 
tion of  the  Commission  in  connection  with  the  passage 
of  the  Panama  Canal  Act  in  191 2. l  While  this  Act,  so 
far  as  railroads  were  concerned,  had  in  mind  primarily 
the  problem  of  competition  between  the  two  coasts,  it 
went  farther  and  attempted  to  solve  once  and  for  all 
the  question  of  intercorporate  relationships  between 
rail  and  water  carriers.  It  provided  that  after  July  i, 
1914,  it  should  be  unlawful  for  any  railroad  to  own, 
lease,  operate,  or  control  or  have  any  interest  whatso- 
ever through  stockholding  or  community  of  manage- 
ment, in  any  water  carrier  operating  through  the  Pana- 
ma Canal.  Neither  was  any  such  relationship  to  con- 
tinue elsewhere  than  through  the  Canal  in  cases  where 
the  railroad  did  or  might  compete  with  the  water  line 
for  traffic.  It  was  a  definite  attempt  to  force  competi- 
tion by  legislative  edict. 

But  this  provision,  while  apparently  satisfactory  in 
its  application  to  the  canal,  required  some  leeway  when 
applied  to  other  situations.  Accordingly  it  was  further 
provided  that  if  the  Commission  should  be  of  the  opinion 
that  any  existing  water  service  other  than  through  the 
Panama  Canal  was  being  operated  in  the  public  interest, 
and  was  of  advantage  to  the  convenience  and  commerce 
of  the  people,  and  that  it  did  not  exclude,  prevent,  or 
reduce  competition,  it  might  permit  the  intercorporate 
» 37  Stat.  L.f  566. 


84  RAILROADS  AND  GOVERNMENT 

relationship  between  the  rail  and  water  lines  to  continue. 
But  in  every  such  case  the  "rates  schedules  and  practices" 
of  the  water  carrier  were  to  be  filed  with  the  Commis- 
sion, and  were  subject  to  the  Act  to  the  same  extent  as 
were  those  of  the  controlling  railroad.1  Thereby  the 
authority  of  the  Commission  was  extended  to  cover  all 
water  carriers  that  were  retained  under  the  control  of 
railroads.  This  left  entirely  free  from  control  water 
carriers  operating  through  the  Panama  Canal,  and  all 
other  independent  water  carriers  that  refrained  from 
participating  in  joint  business  with  railroads. 

The  prevailing  relationship  between  water  and  rail 
carriers  at  the  time  of  the  passage  of  the  Panama  Canal 
Act  is  shown  by  a  report  of  the  Commission  on  the  rela- 
tions between  carriers  by  water  and  rail  prepared  in 
response  to  a  Senate  resolution.2  This  report  showed 
that  27  railroad  systems  were  interested  either  directly 
or  through  subsidiaries  in  transportation  of  freight  by 
water,  and  121  railroads  were  associated  with  86  water 
carriers  through  some  form  of  intercorporate  relation- 
ship, stockholding,  joint  directorate,  or  joint  management. 
The  total  gross  tonnage  of  vessels  represented  in  these 
two  categories  was  3,000,000.  Of  the  gross  tonnage  of 
the  first  class,  that  of  actual  ownership  and  operation, 
amounting  to  1,058,000  tons,  the  Southern  Pacific  Com- 
pany accounted  for  260,000  tons  and  the  New  Haven 
Railroad  for  162,000  tons.  The  remainder  was  widely 
scattered  among  a  large  number  of  companies,  about 
200,000  tons  being  found  on  the  Great  Lakes. 

By  1914  the  Commission  had  received  fifty-eight  appli- 
cations for  continuance  of  joint  rail  and  water  relation- 
ship, the  petitioners  including  seventy-nine  water  lines. 
Many  of  the  adverse  decisions  of  the  Commission  were 
bitterly  contested.  But  the  Commission  fell  back  upon 
the  clear  mandate  of  the  law.  It  held  that  the  compe- 

1 1.  C.  C.  Act.,  Sec.  5  (9-11).  l  39  I.  C,  I  (1916). 


RELATIONS   OF  RAIL  AND  WATER  LINES  85 

tition  referred  to  in  the  section  was  not  "a  vague  indefi- 
nite or  remotely  possible  competition,  but  something 
real  and  substantial."  When  this  kind  of  competition 
prevailed,  it  had  no  power,  so  it  said,  to  abate  the  pro- 
hibition against  common  ownership  without  clear  evi- 
dence that  a  continuance  would  not  prevent  or  reduce 
such  competition.  Testimony  of  shipping  interests  that 
the  water  service  was  essential  and  was  in  the  public 
interest,  which  were  factors  that  were  required  by  the 
statute  to  be  given  consideration,  was  not  sufficient  to 
bring  from  the  Commission  a  ruling  permitting  a  con- 
tinuance of  rail  control  unless  it  could  be  shown  that 
competition  was  negligible.  The  Commission  appre- 
ciated the  situation  in  which  commercial  interests  were 
placed,  but  it  felt  that  the  wording  of  the  statute  was 
specific  and  that  relief  must  be  sought  at  the  hands  of 
Congress.  In  fact,  in  its  1917  annual  report,  it  recom- 
mended that  the  Commission  be  empowered  to  permit 
a  continuance  of  railroad  ownership  of  water  lines  when 
such  continuance  was  in  the  interest  and^for  the  con- 
venience of  the  public,  even  though  such  ownership 
might  reduce  competition  on  the  water  route. 

As  a  consequence  of  this  strict  interpretation  of  law, 
there  took  place  a  very  considerable  unscrambling  of 
intercorporate  relationships.  At  the  same  time,  con- 
tinuance of  ownership  was  granted  in  many  instances 
where  a  casual  examination  would  have  predicted  a  con- 
trary outcome.  The  Central  of  Georgia  was  permitted 
to  retain  its  ownership  of  the  Ocean  Steamship  Company1 
and  the  New  Haven  was  left  in  undisturbed  possession 
of  its  steamship  lines  on  Long  Island  Sound.2  In  the 
case  of  the  Old  Dominion  Steamship  Company,  owned 
by  five  railroads,  four  of  the  owners,  the  Southern, 
Chesapeake  and  Ohio,  Seaboard,  and  Atlantic  Coast 
Line,  were  held  not  to  offend  the  law  and  were  left  in 

1 37  I.  C.  C,  422.  *  50  I.  C.  C.,  634. 


86  RAILROADS  AND   GOVERNMENT 

possession,  but  the  Norfolk  and  Western  was  compelled 
to  dispose  of  its  share.1  In  the  instance  of  the  Morgan 
line  operating  between  Galveston  and  New  Orleans  and 
New  York,  retention  of  ownership  by  the  Southern  Pacific 
Company  was  permitted  after  the  steamship  company 
had  corrected  certain  discriminations  against  New  Or- 
leans and  made  certain  changes  in  its  rate  policy.2 

But  the  most  serious  upset  in  existing  relationships 
took  place  on  the  Great  Lakes  where  railroads  succeeded 
in  retaining  little  except  their  car  ferries.  The  roads 
that  were  compelled  to  dispose  of  their  lake  lines  were 
the  Pennsylvania,  Lehigh  Valley,  New  York  Central, 
Rutland,  Erie,  Grand  Trunk,  and  the  Lackawanna. 
The  Commission  found  that  not  only  did  the  amendment 
forbid  continuance  of  possession  when  the  railroad  ac- 
tually paralleled  the  water  line,  but  also  when  the  owning 
road  was  a  party  to  through  all-rail  tariffs,  or  was  a  mem- 
ber of  a  fast  freight  line  or  of  an  association  of  railroads 
owning  boat  lines,  the  function  of  which  was  to  keep 
the  operation  of  its  boat  lines  from  interfering  with  rail 
operations.  This  was  the  issue  in  the  Lehigh  Valley 
case  in  which  the  carrier  contended  that  its  geographi- 
cal location  made  it  impossible  for  it  to  compete  with  a 
water  line.  But  the  Commission's  dissolution  order  was 
upheld  by  both  district  and  Supreme  Court.3  It  was  the 
intent  of  Congress  in  enacting  the  clause  to  restore  the 
conditions  that  prevailed  when  railroads  had  no  interest 
in  and  exercised  no  control  over  the  boat  lines  plying 
the  country's  water  routes. 

There  is  another  phase  of  water-line  regulation  created 
by  the  Panama  Canal  amendment  to  which  relatively 
little  public  attention  has  been  thus  far  directed,  but 
which  will  command  an  increasing  share  of  public  inter- 
est as  the  legislation  of  1920  becomes  operative.  It 

'41  I.  C.  C.,  285.  243  I.  C.  C.,  168;  45  I.  C.  C,  505. 

8  234  Fed.  Rep.,  682;  243  U.  S.,  412  (1917). 


RELATIONS   OF  RAIL  AND  WATER  LINES  87 

was  provided1  that  when  property  was  transported  by 
rail  and  water  either  through  the  Panama  Canal  or  else- 
where, the  Commission  should  have  jurisdiction  to  re- 
quire suitable  physical  connection  between  the  rail  line 
and  the  dock  whenever  such  connection  could  be  safely 
made,  was  reasonably  practicable,  and  was  justified 
financially  by  the  amount  of  business  involved.  To  the 
Commission  was  given  authority  to  determine  the  terms 
on  which  this  connecting  track  should  be  operated,  and 
this  authority  extended  over  owners  of  docks  that  were 
not  carriers.  It  was  given  authority  to  establish  through 
routes  and  maximum  joint  rates  over  the  rail  and  water 
lines  thus  connected;  to  establish  maximum  proportional 
rail  rates  that  should  apply  to  and  from  the  port  on  joint 
water  and  rail  traffic,  and  to  determine  to  what  traffic 
and  vessels  and  under  what  conditions  these  proportional 
rates  should  apply;  to  require  any  rail  carrier  that  en- 
tered into  arrangements  with  a  water  carrier  for  handling 
through  business  from  an  interior  point  in  the  United 
States  to  a  foreign  country  to  enter  into  similar  arrange- 
ments with  any  other  steamship  line  from  the  same  port.2 
The  purpose  of  this  amendment  is  obvious  on  its  face- 
to  break  down  prevailing  port  and  dock  monopolies  and 
exclusive  traffic  agreements  between  specific  rail  and 
water  lines,  and  to  throw  open  this  joint  business  in  the 
interest  of  a  larger  public. 

That  this  situation  needs  thorough  overhauling  and 
vigorous  handling  will  be  evident  to  any  one  who  gives 
it  careful  examination.  In  1911  the  Commission  re- 

1  Sec.  6  (13). 

2  This  section  was  modified  in  the  Act  of  1920  by  providing  that 
construction  of  connecting  tracks  should  be  subject  to  the  same  find- 
ings of  public  convenience  and  necessity  as  were  required  in  the  case 
of  new  construction  under  Sec.  i ;  by  eliminating  the  control  over  docks 
owned  by  other  parties  than  the  carriers;  and  by  extending  authority 
in  the  case  of  proportional  rail  rates  to  minimum  as  well  as  maximum 
rates. 


88  RAILROADS  AND  GOVERNMENT 

ported1  indictments  against  a  series  of  railroads  which 
had  been  leasing  their  docks  and  valuable  terminal  fa- 
cilities to  favored  shippers,  the  lease  contract  giving  the 
shipper  control  of  the  dock  and  granting  him  certain 
allowances  for  operating  it  which  amounted  to  discrimi- 
nations and  rebates.  This  relation  prevailed  not  only 
at  lake  ports  but  at  gulf  and  ocean  ports  as  well.  The 
purpose  of  the  carriers  was  to  relieve  themselves  of  the 
operation  of  the  terminals  and  take  them  out  from  under 
the  jurisdiction  of  the  Commission.  On  the  theory  that 
the  terminals  are  private  property,  they  have  sometimes 
denied  the  facilities  altogether  to  some  shippers  while 
granting  them  to  others.2  The  fundamental  principles 
here  at  issue  will  be  discussed  later  when  the  whole  sub- 
ject of  the  future  water-transportation  policy  is  under 
consideration. 

1  Annual  Report,  1911,  p.  10. 

2  See  Louisville  and  Nashville  policy  in  33  I.  C.  C.,  213,  and  27 1.  C.  C., 

252. 


CHAPTER  VII 

THE   LABOR  PROBLEM 

AT  the  time  the  railroads  were  taken  over  by  the  Gov- 
ernment, it  is  probable  that  not  much  over  one-third  of 
the  employees  were  organized  into  unions.  Of  the 
organized  employees,  the  four  brotherhoods  comprising 
the  men  in  train  service  were  the  most  powerful  and  had 
developed  the  principle  of  collective  bargaining  to  the 
greatest  degree.  By  1910  "concerted "  movements  among 
employees  in  train  service  had  become  common.  For 
many  years  previously,  negotiations  had  been  conducted 
on  the  individual  road  by  representatives  of  the  "local," 
and  the  gains  then  acquired  had  been  used  as  a  lever  for 
securing  similar  concessions  on  a  rival  line.  But  although 
this  accomplished  much,  it  was  an  arduous  and  slow- 
moving  process.  It  was  evident  that  more  could  be 
accomplished  by  combined  effort  over  an  extended  terri- 
tory. 

Meanwhile  the  roads  were  associating  themselves 
together  more  closely  for  various  purposes.  Whether 
this  grouping  came  in  response  to  the  growing  power  of 
labor,  or  whether  the  larger  labor  organization  was  ren- 
dered necessary  by  the  growth  in  railroad  co-operation, 
is  a  question  that  cannot  be  definitely  answered.  Neither 
party  seems  desirous  of  claiming  priority.  But  certain 
it  is  that  by  1910  federations  of  employees  in  train  ser- 
vice were  facing  federations  of  general  managers,  not 
nationally  but  over  wide  territories,  coincident  with  the 
three  classification  territories  of  the  country. 

National  legislation  on  the  wage  problem  goes  back  to 
the  Erdman  Act  of  1898,  which  did  not,  however,  become 


90  RAILROADS  AND  GOVERNMENT 

an  active  influence  in  wage  controversies  until  the  end  of 
1906.  It  was  confined  to  employees  engaged  in  train 
service.  Its  main  function  proved  to  be  to  provide  ma- 
chinery for  mediation.  It  designated  two  federal  officials, 
the  Commissioner  of  Labor  and  the  chairman  of  the  In- 
terstate Commerce  Commission,  as  mediators,  who,  in 
case  of  a  controversy  interrupting  the  business  of  a  com- 
mon carrier,  were  at  the  request  of  either  party  to  en- 
deavor to  effect  a  settlement.  In  case  of  failure,  a  board 
of  arbitration  of  three  might  be  appointed,  one  member 
by  each  of  the  parties  and  the  third  by  the  two  appoint- 
ees. It  was  to  be  stipulated  in  the  signed  agreement  to 
arbitrate  that  employees  dissatisfied  with  the  award  could 
not  quit  the  service,  nor  could  employers  discharge  their 
men  before  the  expiration  of  three  months,  without  thirty 
days'  notice.  The  award  was  to  be  final  unless  set  aside 
for  errors  of  law,  and  was  to  continue  in  force  for  a  year. 
Procedure  under  the  act  was  purely  voluntary.  Neither 
side  was  compelled  to  resort  to  it,  and  neither  side  was 
obliged  to  accept  the  offer  of  mediation  after  it  had  been 
made.  Furthermore,  the  mediators  had  no  power  to  in- 
tervene until  invited  by  one  of  the  contestants.  Yet,  in 
spite  of  the  strict  legal  limitations  of  the  statute,  the  im- 
perative necessity  for  uninterrupted  transportation  and 
the  power"  of  the  public  to  bring  its  will  to  bear  made 
appearance  of  "free  will"  in  large  degree  illusory.  Rail- 
road managements,  faced  with  the  problem  of  suspension 
of  service,  realized  its  heavy  cost  to  them  financially 
and  likewise  fully  appreciated  the  fact  that  an  incon- 
venienced public  would  be  deaf  to  any  appeal  on  the 
merits  of  the  controversy,  and  would  visit  its  wrath 
upon  the  delinquent  corporation.  Therefore  it  is  not  sur- 
prising to  find  that  the  railroads  as  a  rule  were  the  ones 
to  appeal  to  the  mediators,  and  it  indicates  the  brother- 
hoods' sensitiveness  to  public  opinion  that  with  very  few 
exceptions  they  agreed  to  mediation,  even  though  in  most 


THE  LABOR  PROBLEM  pi 

cases  they  possessed  the  strategic  advantage  in  the  con- 
troversy. It  has  been  stated  that  the  mediators  were  not 
empowered  by  the  Erdman  Act  to  intervene  of  their  own 
initiative,  yet  they  did  so  more  than  once  at  the  request 
of  the  President  of  the  United  States.  What  appears  to 
be  only  voluntary  "getting  together"  becomes  practically 
compulsory  when  the  head  of  the  nation,  representing 
the  whole  people,  sends  his  "mediators"  to  the  scene  of 
impending  conflict. 

As  controversies  assumed  larger  dimensions  and  the 
concerted  movement  became  a  regular  and  apparently  a 
permanent  method  of  negotiation,  it  was  realized  that  a 
board  of  three  members,  in  which  the  decision  lay  with 
one  man  alone,  was  too  small  a  body  to  which  to  intrust 
issues  of  such  magnitude.  This  was  the  motive  for  re- 
placing the  Erdman  Act  in  1913  with  the  so-called  New- 
lands  Act.  At  this  time  negotiations  were  being  conducted 
between  the  railroads  and  the  conductors  and  trainmen 
in  Eastern  territory.  Both  sides  realized  the  desira- 
bility of  a  larger  board  and  pressed  for  immediate  legis- 
lation. Certain  changes  in  the  form  of  procedure  long 
recognized  as  needed  were  also  urged  and  adopted.  The 
Newlands  Act  provided  first  for  mediation  by  a  Board  of 
Mediation  and  Conciliation,  consisting  of  a  permanent 
commissioner  and  two  other  government  officials.  They 
were  given  the  power  not  possessed  by  the  former  media- 
tors of  proffering  their  services.  In  case  the  controversy 
went  to  arbitration,  the  board  might  consist  of  six  mem- 
bers rather  than  three  if  the  parties  preferred,  two  repre- 
senting each  side  and  two  intermediaries  chosen  by  a 
majority  vote  of  the  four.  A  majority  might  make  a 
binding  award.  The  board  was  to  confine  itself  in  its 
decision  to  questions  specifically  submitted  or  to  matters 
directly  bearing  thereon,  and  misunderstandings  concern- 
ing the  interpretation  of  the  award  were  to  be  referred 
back  to  the  board. 


92  RAILROADS  AND   GOVERNMENT 

This  machinery  differed  from  that  of  the  Erdman  Act 
in  certain  fundamental  particulars.  It  provided  for  a 
permanent  Commissioner  of  Mediation,  thereby  making 
it  more  probable  that  the  work  of  the  mediator  would 
be  informed  and  expert,  and  hence  more  acceptable  to 
both  sides.  To  be  sure,  the  working  of  the  old  Act  had 
been  effective  because  of  the  skill  and  experience  acquired 
by  the  two  federal  officials,  who  fortunately  had  retained 
their  official  positions  during  the  life  of  the  statute.  Had 
the  occupants  of  these  positions  changed  frequently— 
the  chairmanship  of  the  Interstate  Commerce  Com- 
mission now  shifts  annually — no  such  satisfactory  re- 
sults would  have  been  accomplished.  Another  signifi- 
cant amendment  to  the  procedure  introduced  in  the  New- 
lands  Act  was  the  reference  of  misunderstandings  con- 
cerning the  award  of  arbitration  back  to  the  board  for 
interpretation.  One  of  the  evils  that  grew  out  of  the 
voluntary  arbitrations  in  1912  and  1913  was  that  awards 
made  by  inexperienced  neutral  arbitrators  were  diffi-' 
cult  to  understand  and  were  left  for  interpretation  to 
local  railroad  officials.  The  employees  charged  that 
interpretation  had  deprived  them  of  much  that  arbitra- 
tion had  granted.  Again  arbitrations  were  thereafter 
to  be  confined  to  the  evidence  formally  submitted  to  the 
board.  One  of  the  criticisms  passed  upon  the  board  by 
the  labor  group  in  the  engineers'  case  in  1912  was  that  it 
had  gone  outside  the  evidence  and  reached  its  conclusions 
from  data  independently  assembled. 

Wage  controversies  of  wide  territorial  extent  followed 
one  another  rapidly  between  1910  and  1916.  In  1910 
increased  cost  of  living,  through  the  rapid  rise  of  prices, 
was  bearing  heavily  upon  the  employees.  The  media- 
tions of  this  year  resulted  invariably  in  increases,  and 
standardization  of  conditions  was  spreading  throughout 
the  Eastern  district.  An  elaborate  arbitration  on  the 
New  York  Central  furnished  guidance  for  the  settlement 


THE   LABOR  PROBLEM  93 

of  disputes  on  many  other  roads.  In  1912  occurred  the 
most  important  labor  dispute  that  had  arisen  in  the  coun- 
try since  the  anthracite  strike  in  1902.  It  involved  the 
Brotherhood  of  Locomotive  Engineers  on  fifty-two  roads 
in  the  Eastern  district.  It  was  adjusted  by  a  voluntary 
arbitration  board  of  seven  members,  five  representing 
the  public.  The  demand  of  the  engineers  was  for  a 
higher  wage  due  to  increased  cost  of  living  and  for  stand- 
ardization of  pay  on  all  the  roads,  with  a  minimum  rate. 
The  roads  opposed  it  on  the  ground  of  inability  to  pay, 
and  the  fact  that  an  increase  would  disturb  the  differ- 
ential between  the  engineers  and  other  classes;  in  other 
words,  it  would  result  in  demands  from  other  classes  for 
a  restoration  of  the  balance.  The  board  granted  sub- 
stantial increases  in  pay  and  established  the  principle  of 
the  minimum  wage  for  the  district.  It  recommended 
the  creation  of  federal  and  state  wage  commissions  simi- 
lar to  the  public  service  commissions,  which  was  dis- 
sented to  by  the  representative  of  the  employees  on  the 
ground  that  it  would  amount  to  a  form  of  compulsory 
arbitration. 

What  the  railroads  had  feared  now  promptly  took 
place.  One  organization  after  another  came  forward 
with  demands.  The  firemen  in  Eastern  territory  settled 
their  controversy  in  1913  with  an  arbitration  board  of 
three,  appointed  under  the  Erdman  Act.  Further  con- 
troversies appearing  on  the  horizon,  the  Act  was  amended, 
as  already  described,  by  the  passage  of  the  Newlands  Act, 
and  the  conductors  and  trainmen  of  the  Eastern  district 
submitted  their  grievances  to  a  board  of  six  under  the 
amended  law.  This  was  followed  by  arbitrations  in 
Western  territory  in  1915. 

It  was  evident  to  close  observers  that  while  these  ne- 
gotiated settlements  were  accepted  by  both  sides,  they 
were,  after  all,  merely  truces.  The  ideal  machinery  of 
adjustment  had  not  yet  been  discovered.  Mediation 


94  RAILROADS  AND  GOVERNMENT 

by  its  own  confession  settled  nothing.  It  was  the  media- 
tor's business  to  keep  the  wheels  moving,  and  he  had 
done  his  job  when  he  had  found  out  what  one  side  was 
willing  to  give  and  what  the  other  was  willing  to  take, 
and  had  brought  them  together.  Whether  there  is  any 
fundamentally  just  wage  is  a  good  deal  of  a  question,  but, 
at  any  rate,  the  mediator  did  not  hunt  for  it.  As  for 
arbitration,  its  unsatisfactory  results  were  due  to  the 
fact  that  the  neutral  arbitrator,  or  arbitrators,  by  the 
very  nature  of  the  case,  knew  absolutely  nothing  of  the 
controversy.  That  was  their  highest  recommendation. 
They  were  chosen  like  the  man  for  the  jury-box.  They 
could  not  in  the  limited  time  of  a  hearing  become  intelli- 
gently familiar  with  the  intricacies  of  railroad  wage 
schedules.  Their  inclination  was  to  seek  middle  ground, 
and  in  their  innocence  they  made  settlements  capable  of 
misunderstanding  and  double  meaning,  and  consequently 
at  the  mercy  of  interpretation  by  individual  railroad 
managers  and  groups  of  employees.  When  this  was 
stopped  by  requiring  in  the  Newlands  Act  the  reference 
of  doubtful  points  back  to  the  board,  controversies 
dragged  and  settlements  were  delayed. 

But  the  decisions  of  the  arbitration  boards  were  not 
more  unsatisfactory  than  the  reasoning  upon  which  they 
were  based.  The  arbitrators  for  the  firemen  in  1913 
shrewdly  gave  no  reasons  at  all,  merely  publishing  their 
award  without  comment.  In  the  conductors'  and  train- 
men's case,  the  first  under  the  Newlands  Act,  the  award 
leaves  the  impression  upon  the  mind  of  the  reader  that 
the  decision  was  first  arrived  at  and  the  reasoning  to 
support  it  later  supplied.  In  the  engineers'  case  in  1912, 
in  which  five  neutral  arbitrators  did  duty,  an  elaborate 
discussion  was  interjected  as  to  what  constitutes  a  rea- 
sonable wage.  But  the  board  got  nowhere.  By  the 
use  of  questionable  statistics,  it  merely  reached  the  con- 
clusion that  wages  should  bear  some  relation  to  those  in 


THE  LABOR  PROBLEM  9| 

other  industries  and  in  the  same  industry  in  other  parts 
of  the  country. 

The  somewhat  heated  comment  upon  the  award,  by 
Mr.  Stone,  chief  of  the  engineers'  brotherhood,  is  worth 
quoting,  because  it  uncovers  the  real  difficulties  of  this 
arbitration  method. 

"They  selected  five  men  of  international  reputation, 
very  learned  men  in  their  professions,  but  who  knew  abso- 
lutely nothing  about  the  A  B  C  of  railroading  or  the 
fundamental  principles  underlying  a  wage  scale.  They 
would  not  have  known  a  box  car  from  a  freight-car,  or 
a  passenger-engine  from  a  freight-engine,  if  they  had  met 
them  coming  down  the  street.  They  started  hi  to  make 
a  wage  scale  for  32,000  men,  with  the  local  conditions 
underlying  the  54  railroads,  and  the  result  was  that  they 
stayed  together  as  a  unit,  and  if  reports  are  correct  these 
five  men  representing  the  public,  for  fear  they  might 
become  contaminated  with  the  other  members  of  the 
board,  held  meetings  of  their  own,  which,  if  true,  was  an 
offense  absolutely  inexcusable,  in  my  opinion.  The  re- 
sult was  that  when  the  full  board  did  meet  the  steam- 
roller worked  overtime  and  they  had  their  own  way. 
We  got  what  they  called  an  award.  Nobody  knows  yet 
what  that  award  really  means. 

"On  the  2 gth  day  of  April,  1912,  we  signed  a  contract 
to  arbitrate.  It  was  to  be  binding  for  one  year  from  that 
date — May  i.  It  expired  on  May  i  of  this  year.  On 
the  28th  day  of  November  they  handed  down  the  first 
draft  of  their  award.  On  the  i6th  day  of  February 
they  handed  down  a  subdraft  of  the  report,  or  rather  an 
additional  explanatory  draft  of  what  the  original  draft 
really  did  mean.  And  now  we  are  back  to  them  trying 
to  find  out  what  the  last  award  they  handed  down  really 
means.  And  now  that  the  time  limit  has  expired — on 
May  i  of  this  year — only  19  roads  of  the  54  have  put  it 


96  RAILROADS  AND  GOVERNMENT 

into  operation,  and  we  are  still  trying  to  get  the  rest,  and 
we  hope  at  least  that  our  grandchildren  will  get  the  bene- 
fit of  the  award  .  .  .  They  were  very  learned  gentlemen 
in  their  particular  class.  One  man  has  an  international 
reputation  as  a  geologist.  He  wrote  a  part  of  some  80  or 
90  pages  of  this  report,  on  political  economy  and  sociol- 
ogy, and  arbitrated  a  number  of  questions  that  no  one 
dreamed  would  ever  be  arbitrated.  That  was  the  unfor- 
tunate feature  of  it."1 

The  substitution  of  arbitration  for  mediation  had  re- 
sulted in  no  enduring  gains.  It  had  deprived  the  wage 
controversy  of  the  aid  of  expert  mediators.  It  had 
substituted  the  forms  of  judicial  procedure,  but  the  ver- 
dicts were  in  every  case  compromises  emerging  from  the 
struggle  of  conflicting  interests.  Neither  was  this  arbi- 
tration method  employed  by  the  contestants  as  an  ideal 
system  should  be,  to  discover  if  possible  the  proper  basis 
for  a  reasonable  wage.  It  was  used,  as  always  has  been 
the  case  and  perchance  always  will  be,  as  a  source  from 
which  certain  results  were  to  be  extracted  by  the  particu- 
lar process  which  at  the  time  seemed  most  effective. 
Cost  of  living  was  usually  advanced  as  an  argument  be- 
cause prices  were  continuously  rising.  The  preservation 
of  the  differential  between  different  classes  and  between 
the  same  classes  in  different  parts  of  the  country  was 
strongly  urged.  Perhaps  the  most  picturesque  argument 
was  that  employees  should  share  in  the  productive  ef- 
ficiency of  the  plant  and  organization  of  which  they  were 
a  part,  an  argument  of  which  little  is  heard  in  these  days 
when  the  plant  is  no  longer  productive.  The  railroads 
in  the  main  fell  back  upon  their  inability  to  pay  and 
presented  statistics  which  revealed  to  the  boards  their 
uncertain  financial  condition.  But  this  again  was  an  argu- 
ment which  could  have  little  weight  if  the  board  of  arbi- 

1  Testimony  before  Senate  Com.  on  Interstate  Commerce,  1913. 


THE  LABOR  PROBLEM  97 

tration  were  genuinely  seeking  for  a  reasonable  wage. 
This  having  been  determined,  it  would  be  the  busi- 
ness of  the  railroad  to  find  the  money  with  which  to 
pay  it. 

In  1916  occurred  the  first  nation-wide  labor  movement 
in  the  railroad  field,  a  movement  the  results  of  which  have 
been  profoundly  influential  upon  all  the  relations  of 
capital  and  labor  in  this  industry.  This  was  the  move- 
ment for  the  eight-hour  day  in  train  service.  It  followed 
upon  several  years  of  labor  controversy  and  adjustment 
which,  as  already  indicated,  had  not  been  satisfactory  to 
labor.  The  year  1916  was  an  unusually  restless  one. 
There  was  the  general  activity  of  industry  due  to  the 
European  War,  and  the  unusually  favorable  position 
of  labor  brought  about  by  the  extraordinary  demand 
for  its  services,  and  by  the  scarcity  of  labor  resulting 
from  diminished  immigration.  Cost  of  living  was  rising 
rapidly.  Employees  everywhere  were  demanding  higher 
wages,  shorter  hours,  union  recognition.  It  was  in  this 
atmosphere  that  the  chiefs  of  the  four  brotherhoods 
representing  400,000  men  made  a  demand  upon  the 
managers  of  200,000  miles  of  railroad  for  a  "basic" 
eight-hour  day  with  time  and  one-half  for  overtime. 
The  railroads  replied  that  under  the  guise  of  securing  a 
shorter  working-day,  the  men  were  employing  a  new 
method  to  secure  increased  wages,  that  the  working- 
day  could  not  be  shortened  to  eight  hours,  that  the  men 
would  receive  for  eight  hours  what  they  were  before 
receiving  for  ten,  and  that  the  additional  two  hours 
would  be  overtime,  to  be  paid  for  at  penalty  rates.  It 
was  estimated  that  the  daily  pay  would  be  increased  by 
25  per  cent  and  the  overtime  pay  by  87^  per  cent,  and 
that  this  would  amount  to  $100,000,000  per  year;1  that 
it  was  a  demand  on  the  part  of  18  per  cent  of  the  em- 
ployees, who  were  already  receiving  28  per  cent  of  the 
1  Compare  estimate  of  Eight  Hour  Commission,  page  103. 


98  RAILROADS  AND  GOVERNMENT 

total  pay-roll.  Conferences  and  efforts  at  mediation 
failed.  Arbitration  was  favored  by  the  carriers  but  re- 
fused by  the  men,  who  held  that  the  question  was  not 
arbitrable.  President  Wilson  took  a  hand  and  proposed 
the  adoption  of  the  eight-hour  day  without  punitive  over- 
time. He  also  promised  to  use  his  influence  for  the 
creation  of  a  federal  commission  that  should  investigate 
the  situation  and  report  measures  of  relief.  This  was 
favored  by  the  brotherhoods  but  flatly  rejected  by  the 
managers.  The  issue  was  drawn  and  each  side  prepared 
for  a  fight  to  a  finish.1  Notwithstanding  the  public  suffer- 
ing likely  to  follow,  each  felt  convinced  that  the  issue 
had  to  be  fought  out  sooner  or  later  in  the  public  interest. 
A  country-wide  strike  was  called  for  September  4  in  the 
midst  of  the  negotiations,  and,  when  the  President  re- 
quested the  withdrawal  of  the  strike  order,  he  was  in- 
formed that  the  convention  of  brotherhood  chairmen 
which  had  called  the  strike  and  dispersed  on  August  27 
was  the  only  body  empowered  to  withdraw  it,  and  that 
it  was  too  late  to  reassemble  the  convention.  It  was  a 
piece  of  cold-blooded  strategy  which  showed  discourtesy 


1 J.  P.  Tumulty,  in  his  "Woodrow  Wilson  as  I  Know  Him,"  makes 
the  following  reference  to  the  President's  conciliatory  efforts:  "I  re- 
member what  he  said  to  me  as  he  left  the  Green  Room  at  the  conclu- 
sion of  his  final  conference  with  the  heads  of  the  brotherhoods.  Shaking 
his  head  in  a  despairing  way,  he  said: '  I  was  not  able  to  make  the  slight- 
est impression  upon  those  men.  They  feel  so  strongly  the  justice  of 
their  cause  that  they  are  blind  to  all  the  consequences  of  their  action 
in  declaring  and  prosecuting  a  strike.  I  was  shocked  to  find  a  peculiar 
stiffness  and  hardness  about  these  men.  When  I  pictured  to  them  the 
distress  of  our  people  in  case  this  strike  became  a  reality,  they  sat  un- 
moved and  apparently  indifferent  to  the  seriousness  of  the  whole  bad 
business.  I  am  at  the  end  of  my  tether,  and  I  do  not  know  what 
further  to  do.' 

"His  conferences  with  the  managers  were  equally  unproductive  of 
result.  Gathered  about  him  in  a  semi-circle  in  his  office,  they  were 
grim  and  determined  men,  some  of  them  even  resentful  of  the  Presi- 
dent's attempt  to  suggest  a  settlement  of  any  kind  to  prevent  the 
strike." 


THE   LABOR  PROBLEM  99 

to  the  President  and  a  cynical  indifference  to  the  public 
consequences  that  should  have  lost  the  brotherhoods  all 
public  support.  But  they  were  now  on  the  war-path. 
On  August  29  the  President  sent  a  special  message  to 
Congress  asking  for  legislation  that  would  avert  the 
impending  catastrophe  and  would  provide  against  any 
future  recurrence.  In  his  message,  after  relating  the 
circumstances  leading  up  to  the  crisis,  and  explaining 
his  proposal  for  settlement,  he  said: 

"The  representatives  of  the  brotherhoods  accepted 
the  plan,  but  the  representatives  of  the  railroads  de- 
clined to  accept  it  in  the  face  of  what  I  cannot  but 
regard  as  the  practical  certainty  that  they  will  be  ulti- 
mately obliged  to  accept  the  eight-hour  day,  by  the  con- 
certed action  of  organized  labor,  backed  by  the  favorable 
judgment  of  society.  The  representatives  of  the  railway 
management  have  felt  justified  in  declining  a  peaceful 
settlement  which  would  engage  all  the  forces  of  justice, 
public  and  private,  on  their  side  to  take  care  of  the 
event.  .  .  .  The  railway  managers  based  their  decision 
to  reject  my  counsel  in  this  matter  upon  their  conviction 
that  they  must  at  any  cost  to  themselves  or  to  the  coun- 
try stand  firm  for  the  principle  of  arbitration,  which  the 
men  had  rejected.  I  based  my  counsel  upon  the  indis- 
putable fact  that  there  was  no  means  of  obtaining  arbi- 
tration. The  law  supplied  none;  earnest  efforts  at  media- 
tion had  failed  to  influence  the  men  in  the  least.  To 
stand  firm  for  the  principle  of  arbitration  and  yet  not  get 
arbitration  seemed  to  me  futile,  and  something  more 
than  futile,  because  it  involved  incalculable  distress  to 
the  country  and  consequences  in  some  respects  worse 
than  those  of  war,  and  that  in  the  midst  of  peace.  .  .  . 
Having  failed  to  bring  the  parties  to  this  critical  contro- 
versy to  an  accommodation,  therefore,  I  turn  to  you, 
deeming  it  clearly  our  duty  as  public  servants  to  leave 


100  RAILROADS  AND  GOVERNMENT 

nothing  undone  that  we  can  do  to  safeguard  the  life  and 
interests  of  the  nation." 

Among  the  specific  proposals  of  his  message  were  the 
eight-hour  day  for  all  train  employees,  a  commission  to 
study  the  effects  of  the  law  upon  railroad  operation,  an 
expression  from  Congress  whether  or  not  the  Interstate 
Commerce  Commission  would  be  justified  in  increasing 
freight  rates  to  cover  the  additional  costs  of  the  shorter 
day,  a  law  making  all  railroad  strikes  unlawful  until 
after  official  investigation,  and  a  grant  of  power  to  the 
President  to  draft  railroad  employees  into  service  when 
required  by  military  necessity. 

On  September  2  Congress  hastily  passed  the  eight- 
hour  law,  which  provided  that  eight  hours  was  to  be 
deemed  a  day's  work  "and  the  measure  or  standard  of  a 
day's  work  for  the  purpose  of  reckoning  the  compensa- 

ftion  for  services."  For  all  "necessary  time"  in  excess  of 
eight  hours  the  pay  was  to  be  not  less  than  pro  rata.  A 
commission  of  three  was  to  be  appointed  to  observe  for 
a  period  of  from  six  to  nine  months  the  operation  and 
effects  of  the  law  and  to  make  a  report  to  the  President 
and  to  Congress.  Beginning  with  January  i,  1917,  and 
until  thirty  days  after  the  report  of  the  investigating 
commission,  compensation  for  a  standard  eight-hour  work- 
day was  not  to  be  reduced  below  the  existing  standard 
day's  wages. 

None  of  the  other  proposals  of  the  President  was  con- 
sidered. All  amendments  were  rejected,  not  on  their 
merits  but  because  they  would  require  time  for  considera- 
tion. The  sole  object  was  to  pass  something  that  would 
avert  a  strike,  and  from  this  standpoint  the  legislation 
was  entirely  successful.  The  strike  order  was  withdrawn. 
But  labor  had  for  the  first  time  tasted  victory  to  the  full. 
For  the  first  time  in  any  significant  way  it  had  seen  the 


THE   LABOR  PROBLEM  IOI 

legislative  machinery  employed  in  its  interest.1  Instead 
of  shunning  political  activity  and  confining  itself  strictly 
to  the  economic  field  of  collective  bargaining,  it  was  from 
now  on  to  take  a  close  personal  interest  in  the  doings  of 
Congress.  Three  of  the  four  brotherhood  leaders  had 
always  been  opposed  to  Government  ownership.  Fol- 
lowing this  experience  and  that  of  the  war  period,  they 
became  ardent  converts,  not  on  altruistic  grounds,  but 
because  they  saw  in  this  relationship  of  Government  and 
employees  advantages  that  could  not  be  secured  from 
private  negotiation. 

Following  the  passage  of  the  Act,  controversy  contin- 
ued for  another  six  months,  which  centred  about  the  ques- 
tion of  the  constitutionality  of  the  law.  The  railroads 
took  prompt  steps  to  test  this  question,  and  succeeded 
in  getting  a  decision  in  November  from  a  United  States 
District  Court  declaring  the  law  unconstitutional,  from 
which  appeal  was  taken  to  the  highest  court.  Mean- 
while the  question  which  troubled  the  brotherhoods 
was  whether  the  eight-hour  day  would  become  effective 
on  January  i,  or  only  in  case  of  a  favorable  decision  of 
the  Supreme  Court.  The  railroads  had  entered  into  an 
understanding  with  the  Attorney-General  to  continue 
on  a  ten-hour  basis,  but  to  give  the  men  back  pay  from 
January  i  in  case  the  law  should  be  upheld.  But  as 
time  passed  without  a  decision,  as  it  became  clearer  that 
we  must  soon  enter  the  war,  labor  became  more  and  more 
restive.  It  felt  the  imperative  necessity  of  clinching 
this  congressional  gift  before  something  might  happen, 
whether  from  the  direction  of  the  court  or  elsewhere, 
to  rob  them  of  it.  Accordingly,  a  national  strike  was 

1  A  forerunner  of  this  form  of  settlement  is  found  in  the  conductors' 
and  trainmen's  dispute  in  1913  in  which  a  threatened  strike  was  averted 
by  the  influence  of  President  Wilson  in  hastening  the  passage  of  the 
Newlands  Act.  Congress  put  to  one  side  amendments  that  gave 
promise  of  procedure  that  was  superior  to  the  proposals  of  the  bill  be- 
cause of  the  pressure  for  immediate  passage. 


102  RAILROADS  AND  GOVERNMENT 

called  for  the  iyth  of  March  to  compel  the  railroads  to 
put  in  the  eight-hour  day  without  awaiting  the  court's 
decision  and  regardless  of  the  constitutionality  of  the  law. 
Members  of  the  cabinet  and  of  the  Council  of  National 
Defense  effected  a  postponement  of  the  strike  date  to 
March  19,  a  court  "decision  day."  Meanwhile  the 
managers,  because  of  the  acute  political  situation  and 
under  the  spur  of  patriotism,  yielded  to  the  men  and  put 
the  eight-hour  day  into  effect  without  waiting  for  the 
court.  On  March  19  the  court  upheld  the  law.1 

Four  justices  dissented  on  the  ground  that  the  law  was 
in  fact  not  a  regulation  of  the  length  of  the  day  but  a 
scheme  for  determining  conditions  of  work  and  pay, 
and  therefore  an  interference  with  freedom  of  contract. 
But  Chief  Justice  White,  who  delivered  the  opinion,  held 
that  the  statute  was  clearly  within  the  power  of  Congress 
under  the  commerce  clause  as  a  means  of  meeting  a 
national  emergency.  When  a  nation-wide  dispute  be- 
tween railroads  and  their  train  operatives  is  likely  to 
result  in  a  general  strike  with  grave  loss  and  suffering 
to  the  country,  Congress  has  power  to  prescribe  a  stand- 
ard of  minimum  wages  not  confiscating  in  its  effects 
but  obligatory  on  both  parties,  to  be  in  force  for  a  reason- 
able time  in  order  that  the  calamity  may  be  averted  and 
opportunity  afforded  the  parties  to  substitute  a  standard 
of  their  own.  Of  significance  in  connection  with  the 
present-day  discussion  of  compulsory  arbitration  as  a 
permanent  solution  of  the  wage  problem,  the  opinion 
says  that  the  Act  amounts  to  an  exertion  of  the  power 
of  Congress  to  arbitrate  compulsorily  the  dispute  between 
the  parties,  a  power  susceptible  of  exercise  by  direct 
legislation  as  well  as  by  enactment  of  other  appropriate 
means.  It  does  not  invade  private  rights  of  employees, 
since  their  rights  to  demand  wages  and  to  have  employ- 
ment individually  or  in  concert  are  not  such  as  they  might 
1  Wilson  v.  New  et  al.,  243  U.  S.  332  (1917). 


THE   LABOR  PROBLEM 


103 


be  if  the  employment  were  in  private  business,  but  are 
necessarily  subject  to  limitation  by  Congress,  the  em- 
ployment accepted  being  in  a  business  charged  with  a 
public  interest,  which  Congress  may  regulate  under  the 
commerce  power. 

The  Eight  Hour  Commission  made  its  report  on  De- 
cember 29,  1917.  It  found  that  a  complete  elimination 
of  overtime  was  not  practicable;  in  other  words,  that  work 
performed  in  ten  hours  before  the  passage  of  the  law 
could  not  now  be  compressed  into  eight.  To  what  ex- 
tent it  would  be  practicable  ultimately  to  limit  the  hours 
of  train  employees  to  eight  per  day  its  limited  investi- 
gation did  not  permit  it  to  determine.  It  examined  pro- 
posals such  as  that  made  by  the  brotherhoods  that  trains 
should  be  speeded  to  an  average  of  twelve  and  one-half 
miles  per  hour  instead  of  being  operated  at  an  average  of 
ten  miles,  and  concluded  from  available  information  that 
it  would  be  more  economical  to  continue  the  existing 
methods  of  operation  with  overtime  than  to  increase  the 
speed  of  trains  by  cutting  the  tonnage.  Neither  was  it 
possible  to  relocate  terminals.  Some  minor  delays  could 
be  eliminated,  and  suggestions  were  made  to  that  end, 
but  they  were  not  numerous  or  fundamental.  It  esti- 
mated the  increase  in  wages  due  to  the  Adamson  Eight 
Hour  Act  as  follows: 

ESTIMATED  ANNUAL  INCREASE  IN  WAGES 
OVER  1916  (CLASS  I  ROADS) 


AMOUNT 

PER  CENT 

Passenger  service  

$    2,^1,2.000 

2.71 

Freight  service  

3I,669,OOO 

IS.O^ 

Yard  service  

27,'t'^.OOO 

24.6O 

Hostlers  

1.875.000 

25.OO 

$63,409,000 

THE  WAR  PERIOD 


CHAPTER  VIII 
THE  RAILROADS'  WAR  BOARD 

WHEN  this  country  finally  realized  that  participation 
in  the  war  in  Europe  was  inevitable,  it  found  little  valu- 
able experience  and  less  statutory  authority  upon  which 
to  build  a  war  administration  of  the  railroads.  Great 
Britain  had  had  a  statute  since  1871  that  provided  a 
method  of  railroad  management  in  case  of  war,  and  since 
1896  there  had  been  an  organization  of  railroad  execu- 
tives which  could  be  converted  into  a  war  board.  The 
Spanish  War  had  taught  us  what  to  avoid.  We  had 
suffered  the  consequences  of  a  decentralized  military 
administration  in  which  co-operation  with  the  railroad 
authorities  was  wholly  absent. 

When  the  troubles  on  the  Mexican  border  arose,  the 
Quartermaster-General  suggested  to  the  Secretary  of 
War  in  the  fall  of  1915  that  the  American  Railway  Asso- 
ciation, composed  of  the  operating  officers  of  the  differ- 
ent railroads,  establish  a  committee  on  military  transpor- 
tation with  which  the  department  could  co-operate  in 
the  transportation  of  troops  and  supplies.  The  com- 
mittee was  appointed,  a  plan  of  co-operation  of  War 
Department  and  railroads  was  drawn  up,  and  when  the 
state  militia  were  mobilized  in  June  1916,  the  plan  was 
made  effective.  By  means  of  a  scheme  earlier  arranged 
between  the  Quartermaster- General  and  the  Master  Car 
Builders'  Association  placards  were  placed  on  car-load 
shipments  of  Government  property,  which  gave  it  pri- 
ority and  prevented  congestion.  Mobilization  of  troops 
and  supplies  was  handled  with  thorough  efficiency.  Out 

107 


108  RAILROADS  AND  GOVERNMENT 

of  this  experience  grew  the  organization  that  was  to  han- 
dle the  railroads  during  the  first  months  of  war. 

In  the  Army  Appropriation  Act  of  August  29,  1916, 
was  a  provision  establishing  a  Council  of  National  De- 
fense "for  the  co-ordination  of  industries  and  resources 
for  the  national  security  and  welfare."  It  was  to  con- 
sist of  six  cabinet  officers  who  were  to  nominate  "an 
Advisory  Commission  consisting  of  not  more  than  seven 
persons,  each  of  whom  shall  have  special  knowledge  of 
some  industry,  public  utility  or  the  development  of  some 
national  resource,  or  be  otherwise  specially  qualified" 
to  perform  the  duties  assigned.  President  Willard,  of 
the  Baltimore  and  Ohio,  was  appointed  to  this  Advisory 
Commission  as  transportation  expert.  The  duty  of  the 
council,  so  far  as  transportation  was  concerned,  was 
"the  location  of  railroads  with  reference  to  the  frontier 
of  the  United  States  so  as  to  render  possible  expeditious 
concentration  of  troops  and  supplies  to  points  of  defense; 
the  co-ordination  of  military,  industrial,  and  commercial 
purposes  in  the  location  of  extensive  highways  and  branch 
lines  of  railroad;  the  utilization  of  waterways." 

In  February  1917,  the  executive  committee  of  the 
American  Railway  Association  met  and  elaborated  plans 
for  a  more  thorough  co-operation  with  the  Government, 
enlarging  their  committee  of  five,  which  had  served  in 
connection  with  Mexican  troubles,  to  eighteen,  under 
the  same  chairmanship,  that  of  President  Fairfax  Harri- 
son, of  the  Southern  Railway.  This  committee  took 
steps  at  once  to  enlist  the  support  of  the  railroads  in  a 
national  plan  of  voluntary  co-operation.  The  declara- 
tion of  war  on  April  6,  1917  led  the  Council  of  National 
Defense  to  seek  for  more  definite  assurances  of  support 
from  the  railroads,  and  they  requested  Mr.  Willard  to 
call  upon  the  railroads  "to  so  organize  their  business  as 
to  lead  to  the  greatest  expedition  in  the  movement  of 
freight."  In  response  thereto,  an  epoch-making  meeting 


THE  RAILROADS'  WAR  BOARD  109 

was  held  in  Washington,  at  which  nearly  700  railroad  ex- 
ecutives attached  their  signatures  to  the  following  reso- 
lution : 

"Resolved,  That  the  railroads  of  the  United  States, 
acting  through  their  chief  executive  officers  here  and  now 
assembled,  and  stirred  by  a  high  sense  of  their  oppor- 
tunity to  be  of  the  greatest  service  to  their  country  in 
the  present  national  crisis,  do  hereby  pledge  themselves, 
with  the  government  of  the  United  States,  with  the 
governments  of  the  several  states,  and  with  one  another, 
that  during  the  present  war  they  will  co-ordinate  their 
operations  in  a  continental  railway  system,  merging  dur- 
ing such  period  all  their  merely  individual  and  competi- 
tive activities  in  the  effort  to  produce  a  maximum  of 
national  transportation  efficiency.  To  this  end  they 
hereby  agree  to  create  an  organization  which  shall  have 
general  authority  to  formulate  in  detail  and  from  time 
to  time  a  policy  of  operation  of  all  or  any  of  the  railways, 
which  policy,  when  and  as  announced  by  such  temporary 
organization,  shall  be  accepted  and  earnestly  made  effec- 
tive by  the  several  managements  of  the  individual  rail- 
road companies  here  represented." 

The  special  committee  on  national  defense  of  the 
American  Railway  Association  was  enlarged  to  thirty- 
three  members,  distributed  geographically,  and  the  execu- 
tive authority  was  placed  in  the  hands  of  a  subcommittee 
of  five,  thereafter  known  as  the  Railroads'  War  Board.1 
Mr.  Willard,  as  ex-officio  member  of  the  executive  com- 

1  The  membership  of  this  committee  was  Fairfax  Harrison,  presi- 
dent of  the  Southern  Railway,  chairman;  Samuel  Rea,  president  of 
the  Pennsylvania  Railroad;  Howard  Elliott,  chairman  of  Committee 
on  Intercorporate  Relations,  New  York,  New  Haven  and  Hartford 
Railroad  Company,  and  chairman  of  executive  committee,  Northern 
Pacific  Railway;  Julius  Kruttschnitt,  chairman  of  the  Southern  Pa- 
cific Co.;  and  Hale  Holden,  president  of  the  Chicago,  Burlington  and 
Quincy  Railroad. 


110  RAILROADS  AND  GOVERNMENT 

mittee,  established  its  relations  with  the  Council  of  Na- 
tional Defense,  and  Mr.  Edgar  E.  Clark,  of  the  Interstate 
Commerce  Commission,  performed  the  same  function 
with  reference  to  that  body.  To  the  War  Board  reported 
various  subcommittees  to  which  were  assigned  such 
functions  as  car-service,  equipment,  materials  and  sup- 
plies, tariffs  and  accounting. 

Before  summarizing  the  activities  of  the  Railroads' 
War  Board  it  is  necessary  to  create  the  background 
by  describing  the  legislation  that  was  on  the  statute- 
books  at  the  time  this  country  entered  the  war,  and  that 
which  Congress  found  it  necessary  to  pass  during  the 
year.  Among  the  amendments  to  the  Interstate  Com- 
merce Act  in  1906  was  one  that  provided  (Section  6)  that, 
in  time  of  war  or  threatened  war,  preference  should  upon 
the  demand  of  the  President  be  given  over  all  other 
traffic  to  the  transportation  of  troops  and  material  of 
war,  and  carriers  should  adopt  every  means  within  their 
control  to  expedite  the  military  traffic.  In  August  1916, 
at  a  time  of  severe  congestion  in  railroad  traffic,  a  clause 
was  inserted  in  the  Naval  Appropriation  Act  providing 
that  in  time  of  peace  shipments  consigned  to  the  United 
States  should  be  exempt  from  any  embargo.  The  1906 
clause  covered  only  military  traffic.  The  1916  provision, 
while  comprising  commercial  traffic,  merely  expedited 
movement.  The  only  other  statutory  power  applicable 
to  the  situation  was  that  conferred  upon  the  President 
by  the  Army  Appropriation  Act  of  1916,  which  gave  him 
authority  in  time  of  war  to  take  possession  of  any  system 
of  transportation  and  to  utilize  it  for  the  transfer  of 
troops  and  war  material  to  the  exclusion,  as  far  as  neces- 
sary, of  all  other  traffic,  and  for  such  other  purposes  as 
the  emergency  might  require.  This  gave  the  President 
a  power  which  he  could  bring  into  play  whenever  the 
voluntary  organization  of  the  railroads  failed  of  accom- 
plishment. 


THE  RAILROADS'  WAR  BOARD  in 

It  early  became  apparent  that  the  war  was  to  be 
fought  not  only  with  troops  and  military  supplies  but 
also  with  food  and  fuel  and  with  the  many  raw  materials 
and  manufactured  goods  that  indirectly  sustain  the 
nation's  fighting  strength.  It  was  not  a  time  when  new 
equipment  could  be  supplied  to  the  railroads  nor  were 
the  railroads  in  position  to  pay  for  it  could  it  have  been 
furnished.  The  task  of  the  War  Board  was  to  get  the 
utmost  possible  service  in  the  interest  of  the  nation  out 
of  the  existing  plant  and  equipment.  Accordingly,  the 
problem  in  its  simplest  form  was  one  in  the  efficient  use 
of  cars.  Centralized  management  of  car-service  had 
been  in  existence  for  some  time  before  we  went  into  the 
war.  Acute  congestion  in  1916  had  led  to  the  location 
in  Washington  of  the  standing  committee  of  the  Ameri- 
can Railway  Association  on  car  efficiency,  which  had 
acted  in  co-operation  with  the  Interstate  Commerce 
Commission.  This  was  reorganized  in  December  1916, 
and  was  given  greater  authority  to  act  in  behalf  of  the 
roads,  apparently  with  the  purpose  of  staving  off  drastic 
recommendations  of  the  Commission  for  an  increase  in 
its  powers,  recommendations  that  resulted  from  the  ap- 
parent inability  of  the  carriers  to  secure  adequate  co- 
operation among  themselves.  This  Commission  became 
later  a  subcommittee  of  the  Railroads'  War  Board.  On 
May  29,  1917,  Congress , passed  the  Esch  bill,  amending 
the  Interstate  Commerce  Act1  substantially  in  the  form 
recommended  by  the  Commission.  This  gave  to  the 
Commission  the  power,  after  hearing,  to  establish  car- 
service  rules  covering  the  movement,  distribution,  ex- 
change, and  return  of  cars,  and  payment  for  their  use. 
Whenever  in  its  judgment  an  emergency  existed,  the 
Commission  might  at  once  without  formal  notice  sus- 
pend the  operation  of  the  rules  and  substitute  others. 
It  might  also  require  the  carriers  to  file  their  car-service 
1Sec.  i  (10-17). 


112  RAILROADS   AND   GOVERNMENT 

rules  and  regulations  as  a  part  of  their  tariffs.  This 
statute  was  merely  permissive,  and  while  the  Commis- 
sion organized  its  division  of  car-service,  it  did  not  assume 
the  powers  granted,  but  preferred  for  the  time  to  hold 
them  in  reserve  and  to  co-operate  with  the  committee 
of  the  carriers. 

It  has  already  been  stated  that  military  supplies  and 
troops  were  not  the  only  traffic  essential  to  the  war. 
Yet  no  formarpower  existed  to  control  the  selection  of 
traffic  and  to  insure  the  uninterrupted  movement  of 
that  which  was  essential.  Accordingly,  on  August  10, 
1917,  Congress  passed  the  Priority  Act,  under  which  the 
President  was  authorized  during  the  war  to  direct  car- 
riers to  give  preference  in  transportation  to  such  traffic 
as  in  his  judgment  was  essential  to  the  national  defense. 
In  their  compliance  with  orders,  carriers  were  to  be  re- 
lieved from  penalty  for  the  violation  of  any  existing  law. 
This  presumably  referred  to  the  discrimination  sections 
of  the  Interstate  Commerce  Act.  Robert  S.  Lovett, 
chairman  of  the  executive  committee  of  the  Union  Pa- 
cific Railroad,  was  appointed  director  of  priority  ship- 
ments. It  was  his  policy  to  interfere  as  little  as  possible 
with  the  independent  operation  of  the  roads,  and  up  to 
the  middle  of  November  he  had  issued  but  two  priority 
orders,  the  first  relating  to  the  handling  of  bituminous 
coal  to  Lake  Erie  ports,  the  second  reserving  the  use  of 
open-top  cars  for  certain  specific  commodities  necessary 
for  national  defense.  It  should  be  emphasized,  there- 
fore, that  during  the  first  nine  months  of  the  war,  April 
to  December  1917,  the  Government  interfered  scarcely 
at  all  with  railroad  operation.  Power  hovered  in  the 
background,  power  to  control  the  distribution  and  use 
of  cars,  even  to  take  possession  of  the  railroad  properties 
themselves,  but  it  was  not  exercised.  Even  the  power 
which  appeared  to  be  so  essential  at  the  time  it  was 
granted,  that  of  discriminating  between  different  sorts 


THE  RAILROADS     WAR  BOARD  113 

of  traffic,  was  exercised  but  sparingly.  The  railroads 
were  given  every  opportunity  to  work  out  the  problem 
for  themselves. 

Much  valuable  service  was  performed  by  the  various 
subcommittees  of  the  War  Board,  which  did  not  attract 
public   attention,  but  which  assisted  in  smoothing  out 
the  difficulties  of  mobilization  and  transportation.     These 
cannot  be  detailed  here.     But  it  should  be  especially 
noted  that  the  spirit  of  co-operation  among  railroads     v)  • 
and   the  various   Government   agencies  connected  with'' 
the  war  was  highly  developed  and  steadily  sustained. 
There  was  apparent  none  of  the  disorganization  that  had 
characterized  our  Spanish  War  administration. 

However,  the  important  task  of  the  railroads  was  that 
of  operation,  the  employment  of  every  available  car  and 
locomotive  to  its  utmost  extent.  Car-service  and  operat- 
ing efficiency  were  the  problems  to  which  the  War  Board 
gave  the  larger  share  of  its  attention.  Its  activities  in 
behalf  of  these  objects  took  two  forms:  first,  instructions 
to  the  individual  carriers  concerning  interchange  and 
routing,  the  allocation  of  special  kinds  of  equipment  to 
specific  uses,  and  the  granting  of  preferential  service  to 
certain  commodities.  Pooling  of  coal  regardless  of  owner- 
ship was  ordered  at  lake  and  coastwise  ports,  thus 
avoiding  the  delays  attendant  upon  the  handling  of  con- 
signments individually  for  specific  shippers.  Box  cars 
were  ordered  pooled  regardless  of  ownership  and  des- 
patched in  train-loads  of  empties  to  sections  where  they 
were  needed.  Passenger- train  service  was  ordered  re- 
duced to  conserve  fuel,  economize  power,  and  free  the 
rails  for  freight  traffic,  and  it  was  estimated  by  the  War 
Board  that  between  May  and  September  there  was  a 
reduction  equivalent  to  25,000,000  train-miles  annually. 

A  second  form  of  activity  of  the  War  Board  was  the 
drive  for  a  more  intensive  loading  of  cars  and  trains.  It 
is  a  well-known  fact  that  because  of  many  conditions 


114  RAILROADS  AND  GOVERNMENT 

under  which  traffic  is  handled,  the  load  per  car  in  normal 
times  has  not  been  up  to  the  capacity  of  the  car  nor  have 
locomotives  hauled  trains  that  on  the  average  approached 
their  registered  tractive  power.1  The  nature  of  the  com- 
modities hauled,  the  physical  conditions  under  which 
they  are  handled,  the  competition  which  compels  the 
granting  of  favors  to  shippers  in  the  matter  of  loading 
requirements,  these  among  other  reasons  have  prevented 
a  showing  of  greater  efficiency.  The  War  Board  started 
a  campaign  for  a  load  not  only  to  the  marked  capacity 
of  the  car  but  to  10  per  cent  in  excess  of  this  capacity — 
the  maximum  load  that  cars  are  constructed  to  sustain. 
Under  the  patriotic  stimulus  shippers  were  induced  to 
abandon  privileges  of  long  standing  and  to  load  to  ca- 
pacity. Doubtless  they  were  encouraged  to  take  this 
course  by  the  lack  of  equipment  and  the  fear  of  being 
deprived  of  even  that  which  they  had.  But  not  only 
was  the  campaign  directed  to  saving  space  but  also  to 
saving  time.  The  railroads'  business  is  not  tons  but 
ton-miles.  Its  cars  are  vehicles,  not  warehouses.  Time 
spent  in  loading  and  unloading  is  just  so  much  waste  to 
be  avoided  if  possible.  It  delays  movement  and  it  em- 
ploys track  room.  In  placement  of  cars  for  loading,  in 
inspection  and  repairs,  in  furnishing  of  the  billing  for 
shipment,  in  the  reduction  of  demurrage  accumulations, 
and  in  numerous  other  ways,  with  the  co-operation  of 
the  shipping  public,  time  was  saved  and  car-service  in- 
creased. The  War  Board's  record  for  the  seven  months 
of  its  service  is  one  which  it  may  well  regard  with  satis- 
faction. If  the  experiment  failed  to  meet  fully  the  war 
exigency,  it  was  not  because  of  a  lack  of  efficiency  in  the 
board,  nor  because  of  a  failure  to  grasp  the  ends  to  be 
achieved  or  the  means  of  reaching  them.  Uncontrolla- 
ble factors  determined  the  ultimate  course  of  events. 

1  The  per  cent  of  car  capacity  utilized  by  loads  declined  from  59.9 
per  cent  in  1904  to  55.4  per  cent  in  1916,  and  was  as  low  as  53.3  percent 
in  1911. 


THE  RAILROADS'  WAR  BOARD  115 

The  most  dramatic  achievement  of  the  War  Board  was 
the  handling  of  troops  and  military  supplies.  In  October 
the  War  Board  announced  that  the  railroads  had  moved 
approximately  720,000  soldiers  from  their  homes  to  train- 
ing-camps or  embarkation  points.  All  but  32,500  men 
in  the  first  5  per  cent  of  the  National  Army  required  spe- 
cial train  service,  involving  13,500  passenger-cars,  in- 
cluding 1,500  Pullman  and  tourist  sleepers,  2,000  baggage- 
cars,  and  4,500  freight-cars.  In  the  handling  of  the 
National  Army,  the  longest  haul  was  from  Yuma,  Arizona, 
to  Fort  Riley,  Kansas — 1,514  miles,  consuming  48  hours; 
the  shortest  that  of  the  District  of  Columbia  unit  to 
Camp  Meade,  Maryland — less  than  25  miles.  The  Na- 
tional Guard  movements  were  mostly  of  great  length,  the 
longest  being  a  battalion  of  engineers  from  San  Francisco 
to  the  Atlantic  coast.  Although  nearly  90  per  cent  of 
the  mileage  of  American  railroads  is  single  track,  all  this 
was  accomplished  without  serious  derangement  of  pas- 
senger schedules,  notwithstanding  that  the  railroads  were 
at  the  same  time  handling  large  amounts  of  Government 
material  in  freight-trains  and  absorbing  an  enormous  ad- 
ditional commercial  traffic  as  a  result  of  the  war.  By 
December  the  troop  movement  amounted  to  a  total  of 
1,867,248  men. 

In  the  handling  of  materials  for  camp  construction, 
the  railroads  showed  the  same  efficiency.  Within  thirty 
days  from  the  date  that  the  Government  placed  its  first 
order  for  cantonment  materials,  there  had  been  delivered 
more  than  12,000  car-loads  of  lumber  and  other  build- 
ing materials  to  the  16  cantonments,  and  many  miles  of 
extra  trackage  had  been  built  by  the  railroads  at  their 
own  expense  for  the  local  handling  of  government  freight. 
Shipments  of  food  and  materials  continued  uninter- 
ruptedly, the  number  of  cars  of  material  of  all  kinds  ar- 
riving at  army  camps  having  reached  by  December  a 
total  of  128,350. 


no 


RAILROADS  AND  GOVERNMENT 


A  study  of  the  statistics  of  operating  efficiency  as  pre- 
sented in  the  table  herewith  reveals  some  interesting 
facts. 

OPERATING  EFFICIENCY,  1917-1919,  BY  MONTHS ' 


CAR  MILES  PER  DAY 

TONS  PER  CAR 
(REVENUE  AND 
NON-REVENUE) 

Month 

1917 

1918 

1919 

1917 

1918 

1919 

January  

25-3 
23-9 
25-6 
27.4 
29.0 
28.4 
28.3 
27.1 
26.6 
26.3 
26.2 
21.3 

18-3 
22.0 

24-9 
25-9 
26.4 
26.8 
26.5 
26.O 
26.8 
26.2 
24.6 
22.8 

21.4 
20.3 
20.4 
21  .O 
22.8 
23.0 
24.1 
24.2 
26.5 
27-3 
23-3 
22.3 

26.4 
26.1 
26.4 
25.6 
26.7 
27.8 
27.1 
27.9 
27.0 
27.7 
27.2 
29.2 

29.6 
28.4 
28.1 
29.4 
27.7 
28.3 
30.1 
30.1 

29-7 
29.7 

29-5 
29.8 

29.0 
27.7 
27.6 

27-3 
27.7 

27-5 
27.8 
28.0 
28.3 
28.0 
26.2 
27.7 

February       

March  

April  

May  

June         

Tulv  . 

August  

September  

October  

November  

December  

Average  

26.1 

24.9 

23.1 

27.0 

29.1 

27.8 

1  Bureau  of  Railway  Economics  summary. 

Car  miles  per  day  and  tons  per  car  showed  a  general 
tendency  to  increase  during  the  War  Board's  adminis- 
tration in  1917.  It  should  be  noted,  however,  that  this 
increase  was  partly  seasonal,  for  the  same  phenomena 
may  be  observed  in  the  succeeding  years.  Comparing  car 
miles  for  the  year  1917  with  those  of  the  two  succeeding 
years  of  federal  operation,  we  find  the  same  general  ten- 
dency toward  improvement  from  the  beginning  of  the  year 
until  September,  with  a  falling  off  thereafter.  In  tons 
per  car,  the  increase  is  very  marked  from  April  to  De- 
cember 1917,  a  gain  which  the  Railroad  Administration 
retained  throughout  1918  and  to  a  lesser  degree  in  1919. 
The  average  load  for  the  two  years  of  federal  control, 


THE  RAILROADS'  WAR  BOARD  117 

which  was  higher  than  the  War  Board  accomplished, 
was  the  direct  result  of  the  pioneer  work  of  that  organi- 
zation. 

But  in  spite  of  every  effort  put  forth  in  the  drive  for 
operating  efficiency,  the  War  Board  began  to  realize  in 
November  that  the  results  were  not  wholly  satisfactory, 
or,  what  is  more  probable,  it  gave  utterance  at  that  time 
to  a  conviction  which  it  must  have  long  entertained. 
Industries  were  speeding  up  to  a  higher  and  higher  pitch, 
creating  an  abnormal  demand  for  fuel  and  raw  materials 
and  for  transportation  for  the  finished  products.  The 
concentration  of  these  industries  in  one  section  of  the 
country  constituted  a  problem  that  the  railroads  of 
other  sections  were  unable  to  relieve.  But  of  more  seri- 
ous import  to  the  fate  of  voluntary  co-operation  was  the 
fact  that  while  the  railroads  had  submitted  themselves 
to  the  orders  of  the  War  Board,  each  railroad  still  handled, 
so  far  as  possible,  the  business  that  normally  belonged 
to  it.  Each  executive  still  dealt  with  his  own  customers. 
While  he  endeavored  to  carry  out  the  orders  from  Wash- 
ington, he  did  it  in  his  own  way  subject  to  no  restric- 
tions. There  were  some  departures  from  this  method, 
notably  in  the  pooling  of  box-car  equipment,  but  as  a 
rule  the  independent  identity  of  the  individual  railroad 
was  maintained.  It  was  perhaps  natural  that  the  War 
Board  should  proceed  slowly  in  exercising  real  authority. 
Anything  in  the  way  of  unified  action  might  have  brought 
the  roads  under  the  condemnation  of  existing  statutes, 
the  Anti-Trust  Act  and  the  Interstate  Commerce  Act. 

And  yet  when  it  is  recalled  that  the  railroads  had  or- 
ganized for  co-operative  action  at  the  suggestion  of  the 
Council  of  National  Defense,  and  that  they  had  pledged 
themselves  on  April  n  to  merge  "their  merely  individual 
and  competitive  activities  in  the  effort  to  produce  a  maxi- 
mum of  national  transportation  efficiency,"  it  is  amazing 
that  not  until  November  24,  when  the  emergency  became 


Il8  RAILROADS   AND   GOVERNMENT 

too  acute  to  be  longer  disregarded,  did  the  board  adopt 
"revolutionary  measures"  to  relieve  congestion  on  the 
Eastern  railroads.  It  then  directed  that  all  available 
facilities  be  pooled  and  that  the  railroads  be  operated 
as  a  unit  "regardless  of  their  ownership  and  individual 
interests."  Doubtless  the  War  Board  moved  as  rapidly 
as  support  from  the  railroads  warranted,  but  there  could 
be  no  clearer  evidence  needed  of  the  fact  that  co-opera- 
tion in  any  genuine  sense  for  war  purposes  was  not  to 
be  accomplished  under  private  management.  A  local 
committee  of  executives  was  appointed  for  this  Eastern 
district  which  promptly  put  out  drastic  orders,  includ- 
ing embargoes,  diversions,  and  suspensions  of  passenger 
service.  But  it  all  came  too  late.  The  Government 
at  Washington  was  convinced  that  more  drastic  action 
was  required  and,  in  the  words  of  Commissioner  Mc- 
Chord,  that  "the  strong  arm  of  governmental  authority 
is  essential  if  the  transportation  situation  is  to  be  radi- 
cally improved." 


CHAPTER  IX 

FEDERAL  CONTROL 

ON  December  26,  1917,  the  President  of  the  United 
States  took  possession  by  proclamation  of  all  the  rail- 
roads and  waterways  of  the  country  under  the  war  pow- 
ers already  described.  There  will  always  be  controversy 
as  to  whether  this  step  was  necessary  or  desirable.  Most 
students  of  the  question,  however,  have  concluded  that 
it  was  not  only  an  inevitable  step,  but  from  the  stand- 
point of  the  public  exigency  was  justifiable  and  wise. 
The  traffic  situation  at  the  time  was  alarming.  In  the 
Eastern  and  Northeastern  section  of  the  country,  traffic 
was  being  created  rapidly  for  export,  and  into  and  through 
this  congested  section  was  moving  from  farther  west  the 
food  and  munitions  for  overseas  consumption,  the  raw 
materials  and  coal  for  the  manufacturing  sections,  the 
building  materials  for  cantonment  use.  Traffic  for  ex- 
port was  being  routed  to  the  usual  outlets  without  any 
attempt  at  distribution  to  different  ports,  because  co- 
operation with  the  shipping  interests  had  not  yet  been 
sufficiently  perfected  to  make  any  other  policy  possi- 
ble. The  situation  was  greatly  aggravated  by  the  abuse 
by  governmental  departments  of  the  priority  privilege. 
The  priority  shipping-tag  seemed  to  be  freely  at  the  dis- 
posal of  any  Government  official  however  humble,  and 
the  extent  of  its  use  depended  upon  the  temperament 
of  the  official.  The  consequence  was  that  at  times  over 
80  per  cent  of  the  freight  on  the  rails  was  travelling  under 
priority  orders,  and  serious  congestion  resulted.  What 
was  necessary  was  a  central  controlling  agency  with  final 
power  to  direct  the  movement  of  traffic  from  its  point  of 

119 


120  RAILROADS   AND   GOVERNMENT 

origin,  and  such  a  plan  was  being  initiated  by  the  Rail- 
roads' War  Board  at  the  time  the  railroads  were  taken 
over  by  the  President. 

There  were  other  operating  troubles  in  this  section 
of  the  country  that  aggravated  the  situation.  Motive 
power  had  been  kept  long  in  service  with  little  oppor- 
tunity for  thorough  overhauling  and  was  crippled  and 
inefficient.  The  burden  was  enhanced  by  the  confisca- 
tion of  many  coastwise  vessels  by  the  Army  and  Navy 
Departments,  thus  throwing  additional  traffic  upon  an 
overloaded  railroad  system.  Added  to  all  this  was  a 
winter  of  unprecedented  severity  that  blocked  the  ma- 
rine terminals  and  stopped  for  a  time  the  flow  of  traffic. 

This  operating  problem  was  confined  almost  wholly 
to  the  East;  there  was  no  traffic  congestion  west  of  Chi- 
cago. It  is  possible  that  from  the  operating  side  alone, 
in  spite  of  their  conflicting  interests,  the  railroads  could 
have  handled  the  situation  with  a  fair  degree  of  success, 
if  they  had  been  encouraged  in  their  efforts  toward  co- 
operation. There  is  no  reason,  for  example,  why  Con- 
gress under  the  stress  of  war  should  not  have  suspended 
for  a  time  the  application  to  the  railroads  of  the  Anti- 
Trust  Act,  thus  permitting  them  freely  to  co-operate 
for  the  common  good.  But,  on  the  contrary,  the  Depart- 
ment of  Justice  kept  watch  on  the  policy  of  the  roads 
during  1917,  and  made  some  inquiries  as  to  the  extent 
of  their  agreements  in  common,  and  no  governmental 
agency  until  the  very  end  of  the  year  took  any  steps  to 
make  the  path  of  the  railroads  easier. 

Railroads  had  been  brought  up  in  a  competitive  at- 
mosphere, in  which  all  attempts  at  common  under- 
standing had  been  definitely  discouraged.  All  our  leg- 
islation up  to  the  war  had  been  in  the  direction  of  the 
preservation  of  competition.  Faced  with  penalties  if  they 
made  any  move  to  divide  earnings  from  competitive 
traffic,  the  roads  naturally  were  not  eager  to  have  their 


FEDERAL  CONTROL  121 

traffic  diverted  without  compensation  to  a  rival  route 
that  might  be  less  congested.  It  was  this  feeling  that 
led  some  executives  even  in  the  face  of  the  agreement 
for  voluntary  co-operation  to  place  the  interests  of  their 
roads  first  and  thereby  to  prevent  the  wholly  effective 
working  of  the  voluntary  plan. 

In  the  statement  accompanying  the  proclamation  of 
the  President  may  be  found  the  reasons  that  influenced 
him  to  take  possession  of  the  roads.  His  first  reason, 
that  they  were  being  deprived  of  earnings  for  which 
there  was  no  compensation  under  the  restrictions  of 
existing  law,  has  already  been  noted,  and  could  have 
been  met  by  a  suspension  of  the  operation  of  the  Anti- 
Trust  Act  and  the  anti-pooling  section  of  the  Interstate 
Commerce  Act.  But  the  other  reasons  were  more  po- 
tent. The  financial  needs  of  the  railroads  and  of  the 
Government  could  not  at  the  same  time  be  met  unless 
they  were  brought  under  a  common  direction.  The 
railroads  were  facing  a  serious  financial  situation.  They 
had  come  into  the  war  with  their  equipment  and  physi- 
cal facilities  in  none  too  good  condition,  and  with  little 
or  no  surplus  to  meet  expansion  in  traffic.  They  were 
now  faced  in  the  Eastern  section  of  the  country  with  an 
unprecedented  traffic  and  a  need  for  rapid  enlargement. 
Their  earnings  were  not  sufficient  to  attract  investors 
readily.  They  had  had  little  success  in  getting  increased 
rates  from  regulating  bodies,  and  the  process  of  getting 
increased  rates,  even  if  ultimately  successful,  was  too  slow 
to  be  relied  upon  in  this  emergency.  Even  had  they 
been  granted  the  increases,  they  could  not  have  met 
their  capital  needs  out  of  their  surplus  earnings.  Capi- 
tal had  to  be  lured  from  the  investor,  who  was  being 
appealed  to  by  the  Government  to  turn  all  his  savings 
into  war  loans.  Without  direct  Government  aid,  there 
was  no  power  to  get  prior  claims  upon  steel  and  other 
materials  needed  for  plant  and  equipment,  nor  even  upon 


122  RAILROADS  AND   GOVERNMENT 

cars  and  locomotives  which  were  going  abroad  for  war 
service.  And  added  to  all  this  were  the  demands  of 
labor  for  the  increases  in  wages  that  the  increasing  cost 
of  living  made  necessary,  and  that  were  being  granted  in 
competitive  industry.  It  seemed  clear  that  the  Govern- 
ment alone  could  keep  labor  satisfied  and  prevent  strikes. 
It  was  a  time  for  a  close  partnership  between  the  rail- 
roads and  the  Government.  The  Government  was 
ready  to  back  the  railroads  in  their  war  service,  but  it 
must  have  the  responsibility  for  their  operation  and  the 
sole  direction  of  their  financial  management.  This  was 
the  price  of  its  aid.  The  programme  of  the  partners 
was  to  be  the  use  of  existing  facilities  and  equipment  to 
their  utmost  capacity  regardless  of  individual  owner- 
ship. 

The  conditions  under  which  the  roads  were  taken  over 
and  operated  are  to  be  found  in  three  documents.  In 
the  presidential  proclamation  the  fundamental  princi- 
ples were  laid  down  upon  which  all  further  legislation 
and  negotiation  were  based.  An  Act  of  Congress  being 
required  for  the  appropriation  of  the  necessary  funds  to 
make  nationalization  effective  and  to  guarantee  the  com- 
pensation to  the  carriers  for  the  use  of  their  property, 
the  Federal  Control  Act  was  passed  on  March  21,  1918. 
Finally  a  contract  in  the  nature  of  a  lease  was  drawn  up 
between  the  Government  and  each  railroad  corporation, 
applying  in  detail  the  principles  laid  down  in  the  procla- 
mation and  the  statute.  Under  this  contract,  the  spe- 
cific property  was  to  be  conveyed  in  legal  form  with  due 
protection  of  the  rights  of  the  owners. 

The  proclamation  assumed  control  of  every  system 
of  transportation  located  within  the  boundaries  of  the 
United  States,  including  coastwise  and  inland  water 
transportation,  terminals,  sleeping-,  parlor-,  and  private- 
car  lines,  elevators,  warehouses,  telegraph  and  telephone 
lines,  but  excepting  street  electric  passenger  railways  and 


FEDERAL   CONTROL  123 

interurbans.  It  was  declared  that  so  far  as  exclusive  use 
for  war  purposes  should  not  be  necessary  or  desirable,  such 
systems  should  be  operated  to  serve  other  national  inter- 
ests and  to  perform  the  usual  duties  of  common  carriers. 
William  G.  McAdoo,  the  Secretary  of  the  Treasury,  was 
appointed  Director-General,  and  he  was  authorized  to 
enter  upon  negotiations  with  the  individual  companies 
for  agreements  as  to  compensation  on  the  basis  of  an 
annual  guarantee,  equivalent  to  the  average  of  the  net 
operating  income  for  the  three-year  period  ending  June 
30,  1917.  Rights  of  stockholders  and  creditors  were  to 
be  preserved,  dividends  and  interest  were  to  be  contin- 
ued until  the  Director-General  ruled  otherwise.  Statutes 
and  orders  of  state  commissions  and  the  Interstate  Com- 
merce Commission  were  to  be  in  effect  so  long  as  the  Di- 
rector should  determine,  but  any  subsequent  orders  of 
the  Director  were  to  have  paramount  authority.  The 
President  reserved  the  right  to  relinquish  in  whole  or 
in  part  any  railroad  or  other  transportation  system  of 
which  he  had  taken  possession. 

The  Federal  Control  Act  enacted  formally  the  terms  of 
the  presidential  proclamation  and  authorized  the  Presi- 
dent to  make  an  agreement  with  and  to  guarantee  to 
any  carrier  as  just  compensation  an  annual  sum  not 
exceeding  the  average  annual  railway  operating  income 
for  the  three  years  ending  June  30,  igiy.1  This  annual 
railway  operating  income  was  to  be  ascertained  and 
certified  to  by  the  Interstate  Commerce  Commission  and 
its  certificate  was  to  be  conclusive.  Any  income  accru- 
ing in  excess  of  the  guaranteed  amount  was  to  remain 
the  property  of  the  United  States.  War  taxes  were  to 

1  The  terminology  of  the  law  and  the  contract  follows  the  account- 
ing terminology  of  the  Interstate  Commerce  Commission.  "Rail- 
way operating  income"  is  derived  by  deducting  from  total  operating 
revenues  the  operating  expenses  and  tax  accruals,  and  by  deducting 
or  adding  the  debit  or  credit  balance  of  rents  for  the  use  of  equipment 
and  of  joint  facilities. 


124  RAILROADS  AND   GOVERNMENT 

be  paid  by  the  corporation,  but  all  other  taxes  were  to  be 
covered  into  operating  expense.  During  federal  control 
dividends  were  to  be  limited  to  the  regular  rates  of  the 
three  test  years,  unless  the  President  approved  of  an 
increase.  If  no  dividends  had  been  paid,  the  President 
might  determine  the  rate.  Every  contract  was  to  con- 
tain adequate  provision  for  maintenance  and  deprecia- 
tion of  the  property  and  for  necessary  reserves,  to  the 
end  that  the  property  of  the  carrier  might  be  returned 
in  substantially  as  good  condition  as  it  was  at  the  begin- 
ning, due  consideration  being  given1  to  the  amounts 
expended  for  maintenance  during  the  three  "test  years" 
of  1915  to  1917.  Provision  was  to  be  made  in  the  con- 
tract for  the  reimbursement  of  the  United  States  for  the 
cost  of  additions  and  betterments,  not  properly  charge- 
able to  the  Government.  The  President  might  make 
or  order  any  carrier  to  make  additions,  betterments,  and 
extensions,  and  provide  terminals,  motive  power,  cars,  and 
other  equipment  necessary  for  war  purposes,  or  in  the 
public  interest.  He  might  advance  any  part  of  the 
expense,  such  advances  to  be  charged  to  the  carrier  and 
to  bear  interest  at  a  rate  determined  by  the  President. 
Expenditures  of  this  kind  made  at  the  expense  of  the 
carrier  with  the  approval  of  the  Government  were  to 
earn  a  reasonable  rate  of  return  for  the  carrier,  to  be 
added  to  the  fixed  amount  of  the  annual  compensation. 

Should  a  carrier  decline  to  sign  an  agreement  with  the 
Government  in  accordance  with  the  terms  outlined  in 
this  statute,  the  President  might  pay  to  the  carrier  90  per 
cent  of  the  estimated  annual  compensation.  The  bal- 
ance was  to  be  adjusted  by  submission  of  the  matter 
to  a  board  of  three  referees  appointed  by  the  Interstate 
Commerce  Commission.  If  the  report  of  the  board  was 
unsatisfactory,  petition  might  be  filed  by  either  party  in 
the  Court  of  Claims. 

A  sum  of  $500,000,000  was  appropriated,  which,  with 


FEDERAL   CONTROL  125 

any  surplus  over  the  operating  income  guaranteed  to 
the  carriers,  was  to  constitute  a  revolving  fund  for  the 
purpose  of  paying  the  expenses  of  federal  control  and 
the  deficits  in  the  guaranteed  income  of  carriers,  and  of 
providing  terminal  facilities  and  equipment.  Moreover, 
in  order  to  provide  funds  to  cover  maturing  obligations, 
to  reorganize  bankrupt  roads,  and  "for  other  legal  and 
proper  expenditures,"  carriers  might  issue  securities  ap- 
proved by  the  President.  These  might  be  purchased 
by  the  Government  from  the  proceeds  of  the  revolving 
fund  at  a  price  not  exceeding  par,  and  sold  by  the  Govern- 
ment at  a  price  not  less  than  cost.  From  the  revolving 
fund  the  President  might  also  make  expenditures  for 
the  utilization  and  operation  of  canals,  and  for  purchase, 
construction,  and  operation  of  marine  equipment,  and 
might  make  such  contracts  for  water  transportation  as 
were  in  the  public  interest. 

The  time  limit  upon  the  period  of  federal  control  was 
fixed  at  twenty-one  months  after  the  proclamation  of 
the  treaty  of  peace,  but  the  President  might  relinquish 
control  of  any  system  of  transportation  not  deemed  need- 
ful or  desirable  prior  to  July  i,  1918,  and  by  agreement 
with  the  owners  release  any  system  at  any  time.  Further- 
more, he  might  relinquish  all  the  railroads  under  federal 
control  at  any  time  he  considered  such  a  step  to  be  de- 
sirable. The  Act  was  expressly  declared  to  be  war  emer- 
gency legislation,  and  was  not  to  be  construed  as  express- 
ing or  prejudicing  the  future  policy  of  the  Government 
concerning  the  ownership  and  control  of  carriers  or  the 
methods  or  basis  of  capitalization.1 

With  the  statute  as  a  guide,  negotiations  were  begun 
for  a  uniform  contract  in  which  the  interests  of  both  sides 
should  be  adequately  protected.  With  conferences  well- 

1  Other  provisions  of  the  Act  relating  to  rates  and  the  relation  of 
the  federal  and  state  commissions  to  the  Government  will  be  con- 
sidered under  their  appropriate  headings. 


126  RAILROADS   AND   GOVERNMENT 

nigh  continuous,  the  final  draft  of  the  "standard  con-- 
tract" was  not  issued  until  late  in  October  1918,  and  so 
varied  were  the  conditions  upon  different  roads  and  so 
numerous  the  claims  for  special  consideration  that  many 
of  the  roads  never  signed  contracts  at  all.  The  stand- 
ard contract  necessarily  followed  the  instructions  of  the 
statute,  in  many  respects  being  merely  a  transcription 
of  provisions  of  the  Act.  It  listed  the  property  taken 
over,  which  included  in  general  everything  from  which 
the  revenues  were  derived  that  made  up  what  was  known 
as  the  "standard  return,"  that  is,  the  officially  deter- 
mined "railway  net  operating  income."  Each  company 
reserved  the  benefit  of  all  leases,  the  revenues  from  which 
were  classified  as  miscellaneous  income,  but  each  com- 
pany gave  the  Director- General  the  right  to  terminate 
leases  of  any  part  of  the  right  of  way  or  yards  when  the 
properties  were  required  for  operating  purposes. 

With  property  transferred  to  the  Railroad  Adminis- 
tration went  all  materials  and  supplies  on  hand  at  mid- 
night of  December  31,  1917,  and  all  "net  balances  receiv- 
able from  agents  and  conductors."  Federal  operation,  so 
far  as  accounting  was  concerned,  was  to  begin  at  midnight 
of  December  31,  1917.  All  expenditures  incurred  by 
the  companies  during  federal  control  which  related  to 
the  maintenance  of  their  corporate  organizations  or  of 
properties  not  taken  over  by  the  Government,  were  to 
be  borne  by  the  companies.  But  the  expenses  of  the 
valuation  then  under  way,  to  the  extent  deemed  neces- 
sary by  the  Director- General,  were  to  be  included  in 
operating  expenses.  The  companies  were  to  have  the 
right  at  all  reasonable  times  to  inspect  the  books  and 
accounts  of  the  Director- General  relating  to  their  own 
properties,  and  the  Director- General  was  required  to 
furnish  the  companies  with  operating  reports  of  their 
properties,  and  annually  with  a  complete  list  of  their 
equipment. 


FEDERAL   CONTROL  127 

Inasmuch  as  the  question  of  maintenance  has  been 
one  of  much  controversy,  it  is  of  interest  to  note  carefully 
the  provisions  for  "upkeep"  embodied  in  the  standard 
contract,  which  were  designed  to  make  effective  the  re- 
quirements in  the  Federal  Control  Act  that  the  property 
should  be  returned  to  its  owners  in  substantially  as  good 
condition  as  when  received.  Section  5  of  the  standard 
contract  required  the  Director- General,  in  order  to  accom- 
plish the  purpose  just  stated,  to  expend  or  charge  to 
operating  expense  proper  sums  for  maintenance,  repairs, 
renewal,  retirement,  and  depreciation.  It  was  provided 
that  a  full  compliance  with  this  covenant  would  be  accom- 
plished if  the  annual  charges  for  such  purposes  during  the 
period  of  federal  control  were  equal  to  the  average  of  the 
three  years  preceding  (1915-1917),  less  the  cost  of  fire  in- 
surance which  the  Government  abolished.  Moreover, 
where  the  safe  operation  of  the  property  necessitated,  the 
Director- General  might  expend  additional  sums  on  the 
basis  of  a  use  similar  to  that  of  the  "test  period,"  which 
should  not  enhance  maintenance  costs  over  the  normal 
standard  of  railroads  of  like  character  and  business.  In 
this  case  such  excess  expenditures  were  to  be  made  good  by 
the  companies.  But  of  particular  significance  in  relation 
to  the  later  controversy  was  the  provision  taking  account 
of  the  shifting  price  level,  which  was  already  a  serious 
factor  when  the  contract  was  drawn  up.  It  was  agreed 
that  in  comparing  amounts  expended  during  federal  con- 
trol with  those  of  the  test  period,  allowance  should  be 
made  for  any  difference  that  might  exist  in  the  cost  of 
labor  and  materials,  and  between  the  amount  of  prop- 
erty taken  over  and  the  average  of  the  test  period,  and 
for  any  difference  in  use  in  the  two  periods  which  in  the 
opinion  of  the  Commission  was  substantial  enough  to 
be  considered,  so  that  the  result  should  be,  as  nearly  as 
practicable,  the  same  relative  amount,  character,  and  dura- 
bility of  physical  reparation. 


128  RAILROADS  AND   GOVERNMENT 

-  Compensation  in  its  general  terms  had  already  been 
provided  for,  first  in  the  President's  proclamation,  and 
then  in  the  Federal  Control  Act.  The  contract  embodied 
the  specific  sum  found  by  the  Commission  and  arranged 
the  details  of  payment.  It  was  provided  that  deduc- 
tions by  the  Government  from  the  guaranteed  return, 
to  cover  excess  maintenance  or  additions  and  better- 
ments not  chargeable  to  the  United  States,  should  not 
be  effected  to  such  a  degree  as  to  prevent  the  companies 
from  making  reasonable  expenditures  for  the  support 
of  their  corporate  organizations,  from  keeping  up  sink- 
ing funds,  and  from  paying  taxes  and  interest.  No  de- 
ductions were  to  be  made  for  additions  and  betterments 
made  for  war  purposes  which  were  not  for  the  normal 
development  of  the  properties,  nor  for  road  extensions. 
It  was  further  stipulated  that  the  power  to  make  deduc- 
tions from  the  guaranteed  return  to  cover  the  cost  of 
additions  and  betterments  not  chargeable  to  the  United 
States  was  an  emergency  power,  to  be  used  only  when 
no  other  reasonable  means  of  reimbursement  could  be 
found,  and  that  it  would  be  the  policy  of  the  Director- 
General  to  so  use  his  power  of  deduction  as  not  to  inter- 
rupt unnecessarily  the  dividend  policy  pursued  by  the 
companies  during  the  test  period.  Without  prior  ap- 
proval of  the  Director- General,  companies  could  not  issue 
securities  or  enter  into  contracts  or  agree  to  pay  higher 
interest  or  rentals  than  prevailed  when  the  roads  were 
taken  over. 

Another  clause  of  the  contract  with  which  controversy 
is  associated  was  that  which  provided  (Section  8  (f) )  that 
the  Director- General  should  not  acquire  any  motive  power 
or  equipment  at  the  expense  or  on  the  credit  of  the  com- 
panies in  excess  of  what  in  his  judgment  was  necessary 
to  provide  for  traffic  requirements  of  their  particular  sys- 
tems. But  such  equipment  once  acquired  might  be  used 
by  the  Director- General  on  any  line  operated  by  him. 


FEDERAL  CONTROL  129 

Protracted  negotiations  took  place  before  the  railroads 
finally  accepted  the  clauses  relative  to  the  right  of  the 
Government  to  restore  deferred  maintenance,  and  to 
deduct  from  the  compensation  under  certain  conditions 
what  was  owed  to  the  Government.  But  the  most  in- 
sistent contention  of  the  carriers,  which  was  finally 
denied,  was  the  right  to  litigation  at  the  end  of  federal 
control  on  the  issue  whether  they  had  suffered  damage 
by  reason  of  diversion  of  business.  It  was  held  by  the 
Director-General,  upon  advice  of  the  Solicitor- General, 
that  the  roads  having  been  taken  over  for  war  purposes, 
Congress  intended  that  the  authorized  compensation 
should  cover  this  element. 

At  the  end  of  federal  control,  contracts  had  been 
signed  by  161  Class  I  roads  that  called  for  an  annual 
compensation  of  $812,500,000.  Fifty-seven  Class  I  roads 
and  large  terminal  companies  signed  no  contracts.  This 
list  of  refusals  includes  the  Southern,  Chicago  and  Alton, 
Chicago  and  Eastern  Illinois,  Long  Island,  Missouri, 
Kansas  and  Texas,  New  York,  Chicago  and  St.  Louis, 
and  Western  Maryland.  In  addition  to  the  Class  I  roads, 
contracts  were  made  with  no  roads  of  Classes  II  and 
III  (with  annual  operating  revenues  of  less  than  $1,000,- 
ooo),  and  with  174  switching  and  terminal  companies. 

The  aggregate  rental  payments,  including  all  facilities 
taken  over  whether  under  contract  or  not,  approximated 
$945,000,000.  This  compensation  was  considered  by 
many  to  be  extraordinarily  liberal  and  much  denuncia- 
tion of  the  Government  ensued.  But  the  railroads  main- 
tained, and  in  individual  instances  certainly  were  justified 
in  maintaining,  that  the  compensation  was  not  adequate. 
For  example,  in  the  case  of  the  Southern  Railway,  which 
declined  to  sign  a  contract,  a  thoroughgoing  policy  of 
betterments  had  been  instituted,  the  results  of  which 
did  not  appear  in  net  earnings  in  the  "test  period,"  and 
hence  would  not  be  provided  for  in  the  contract.  Yet 


130  RAILROADS   AND   GOVERNMENT 

they  were  realized  upon  during  the  period  of  federal  con- 
trol, the  Southern  being  in  consequence  one  of  the  few 
roads  that  consistently  earned  the  standard  return.  The 
question  whether  the  average  earnings  of  the  "test 
period"  constituted  a  fair  compensation  is  really  a  ques- 
tion as  to  whether  the  years  1915-1917  were  normal 
years.  Leaving  out  of  consideration  the  year  1914,  which 
was  nearly  identical  with  1915,  it  would  be  necessary  to 
go  back  to  1908  to  find  as  low  an  aggregate  of  net  operat- 
ing income  as  1915  revealed,  and  1908  was  an  abnormally 
low  year,  suffering  the  consequences  of  the  1907  panic. 
On  the  other  hand,  1916  surpassed  any  previous  year 
in  railroad  history  in  the  aggregate  of  net  operating  in- 
come, being  $300,000,000  greater  than  1915,  and  1917 
was  less  than  1916  by  only  $100,000,000.  Had  the  rail- 
roads enjoyed  the  same  contract  as  the  British  railways, 
which  were  guaranteed  the  net  income  of  the  last  com- 
plete year  before  assumption  by  the  Government,  they 
would  have  received  almost  exactly  what  their  contracts 
called  for.  When  everything  is  considered,  the  bargain 
must  be  adjudged  a  fair  one,  equitable  from  the  stand- 
point of  both  Government  and  carriers. 

A  special  contract  was  drawn  up  to  cover  the  situation 
of  the  so-called  "short  lines."  These  were  small  roads 
independently  owned,  which  relied  almost  wholly  for  their 
solvency  upon  business  furnished  them  by  their  larger 
connections,  and  which  were  not  in  most  cases  essential 
to  the  prosecution  of  the  war.1  It  was  evident  to  their 
owners,  however,  that  unless  their  interests  were  care- 
fully safeguarded,  the  war  policy  of  railroad  operation 
would  leave  them  stranded.  The  presidential  proclama- 

1  The  total  number  of  short-line  railroads,  including  interurbans 
but  not  street-railways,  was  approximately  2,500,  of  which  229  competed 
for  traffic  with  lines  operated  by  the  federal  government.  Six  hun- 
dred operated  as  common  carriers  but  were  non-competing,  and  the 
rest  were  industrial  railroads,  plant  facilities,  tap-lines,  and  terminal 
and  switching  companies. 


FEDERAL   CONTROL  13! 

tion  was  all-inclusive.  It  took  possession  of  "each  and 
every  system  of  transportation"  located  wholly  or  in 
part  within  the  continental  boundaries  of  the  United 
States,  except  street  and  interurban  railways,  plant  facili- 
ties and  industrial  roads,  which  were  excluded  under  the 
limitations  of  the  war  powers  granted  in  1916.  The  Fed- 
eral Control  Act  provided  that  every  independently 
owned  railroad  which  had  competed  with  a  railroad  then 
under  federal  control,  or  which  connected  with  such  rail- 
road, should  be  considered  as  within  "federal  control," 
and  necessary  for  the  prosecution  of  the  war.  But  the 
Act  likewise  provided  that  any  road  not  needed  might 
be  relinquished  prior  to  July  i,  1918.  In  accordance 
with  this  section,  on  June  29,  1918,  there  were  re- 
linquished from  federal  control  2,161  short-line  railroads, 
including  standard  railroads,  plant  facilities,  electric 
lines,  and  switching  and  terminal  roads.  By  restoration 
and  further  relinquishment  under  agreement,  the  net 
number  relinquished  stood  on  January  i,  1919,  at  2,110. 
A  contract  was  drawn  up  for  the  protection  of  these 
relinquished  roads  which  was  open  to  voluntary  signa- 
ture. It  guaranteed  a  fair  division  of  joint  rates,  that 
such  division  should  not  be  reduced  below  that  prevail- 
ing on  January  i,  1918,  and  that  whenever  joint  rates 
were  increased,  the  amount  allotted  to  the  short  line 
should  be  increased  proportionately.  An  equitable  allot- 
ment of  cars  and,  where  possible,  of  motive  power  in  the 
possession  of  the  Director- General  was  guaranteed.  The 
Director-General  might  take  over  the  road  at  any  time 
for  war  purposes,  in  which  case  it  came  under  the  standard 
contract.  Meanwhile  it  agreed  to  obey  all  orders  affect- 
ing the  movement  of  troops  or  war-supplies.  If  the  short 
line  were  a  road  that  formerly  had  enjoyed  competitive 
traffic  with  roads  taken  over  by  the  Government,  it  was 
to  furnish  a  statement  of  its  competitive  traffic  and 
revenue  during  the  test  period  and  of  the  traffic  di- 


132  RAILROADS  AND  GOVERNMENT 

verted  under  the  operation  of  the  Director- General.  If 
the  statement  justified  the  company's  contention  as  to 
diversion,  the  company  was  to  receive  in  cash  the  differ- 

Ience  between  the  total  revenue  on  competitive  freight 
traffic  for  the  seven  months  of  1918  (April  i  to  October 
31)  and  the  average  for  the  corresponding  months  of  the 
test  period,  less  33^  per  cent  of  the  revenue,  retained  to 
cover  out-of-pocket  cost  to  the  lines  that  had  handled  the 
diverted  traffic.  From  November  i,  1918,  arrangements 
were  to  be  made  for  routing  over  the  company's  line  a 
sufficient  amount  of  competitive  traffic  to  bring  the  total 
up  to  that  of  the  test  period.  A  limited  number  of  short 
lines,  amounting  at  the  end  of  1919  to  134  out  of  a  total 
of  800,  signed  the  co-operative  contract,  but  the  large  ma- 
jority declined  to  do  so  because  they  felt  that  it  had 
serious  legal  defects  and  could  not  be  enforced  against  the 
Government. 


CHAPTER  X 

FEDERAL   OPERATION 

IT  has  been  made  clear  that  the  fundamental  purpose  in 
taking  the  railroads  under  federal  control  was  a  military 
one, — to  utilize  our  national  transportation  resources, 
without  regard  to  individual  corporate  interests,  in  as- 
sembling men  for  training  and  in  transporting  supplies 
and  munitions  and  men  overseas.  In  examining  criti- 
cally the  operations  of  the  railroads  under  Government 
direction  this  purpose  should  be  kept  constantly  in 
mind.  The  situation  was  unprecedented.  The  purpose 
to  be  achieved  had  no  relation  whatever  to  the  nor- 
mal objects  of  a  transportation  service.  To  attempt  to 
draw  conclusions,  except  in  a  most  general  way,  as  to 
the  desirability  or  undesirability  of  permanent  Govern- 
ment operation  of  our  railroad  system  is  either  stupidly 
to  overlook  altogether  the  inevitable  requirements  and 
limitations  of  a  war  machine,  or  wilfully  to  deal  in  fal- 
lacious arguments  in  the  hope  of  deceiving  that  portion 
of  the  public  that  does  not  think  for  itself.  As  the  pur- 
pose of  this  book  is  to  trace  the  development  of  federal 
regulation  throughout  the  decade,  the  war  period  will  be 
treated  only  in  such  detail  as  is  sufficient  to  fulfil  this 
object,  and  the  policies  pursued  under  federal  operation 
will  be  examined  primarily  with  regard  to  their  value  as 
permanent  features  of  a  transportation  policy  in  time  of 
peace. 

The  administrative  organization  for  war  purposes 
need  not  be  dwelt  upon.  Its  more  significant  phases 
will  appear  as  the  discussion  proceeds.  Suffice  it  here 
to  say  that  the  Director- General  divided  the  country 
into  regions  for  operating  purposes,  over  each  of  which 

133 


134  RAILROADS  AND   GOVERNMENT 

he  placed  an  experienced  railroad  executive  as  Director. 
Each  of  these  had  his  own  staff.  Federal  managers  in 
charge  of  the  more  important  single  railroads,  or  groups 
of  less  important  lines,  were  as  a  rule  selected  from  the 
operating  staffs  of  the  roads  of  which  they  were  to  take 
charge.  In  many  cases  the  president  of  the  road  was 
made  federal  manager,  but  in  some  instances  the  presi- 
dent was  passed  over  for  one  of  his  subordinates  whose 
duties  had  not  brought  him  as  much  in  touch  with  the 
broader  corporate  problems,  and  whose  loyalty  could, 
from  the  Administration  point  of  view,  be  counted  upon 
more  surely.  The  working  organizations  of  the  railroads 
were  left  unimpaired,  and  only  such  alterations  took 
place  therein  as  resulted  from  voluntary  withdrawal. 
The  central  administration  in  Washington  was  split  into 
divisions  with  a  Director  at  the  head  of  each.  Of  the 
functions  thus  emphasized,  the  most  important  were 
finance  and  purchases,  capital  expenditures,  operation, 
traffic,  labor,  and  public  service  and  accounting.  Walker 
D.  Hines  was  appointed  Assistant  Director- General, 
and  succeeded  Mr.  McAdoo  as  Director-General  upon 
the  latter's  retirement  at  the  end  of  1918.  With  a 
few  exceptions  the  directors  of  the  divisions  and  their 
subordinates  were  drafted  from  the  railroad  service. 
They  were  all  required,  as  were  the  regional  executives, 
to  sever  their  railroad  connections  and  become  Govern- 
ment employees.  They  one  and  all  performed  their  tasks 
with  unwavering  fidelity  to  the  public  interest  and  most 
of  them  with  extraordinary  efficiency.  Whatever  criti- 
cisms may  be  passed  upon  Mr.  McAdoo's  administration, 
he  must  be  given  full  credit  for  his  sound  judgment  in 
intrusting  the  operation  of  the  roads  to  men  of  the  highest 
standing  in  the  railroad  field  and  eliminating  political 
influences.  Those  who  have  been  impatient  with  federal 
operation  usually  overlook  the  fact  that  it  was  in  the 
hands  of  the  same  men  who  are  again  active  in  railroad 


FEDERAL   OPERATION  135 

affairs  now  that  the  roads  have  been  returned  to  their 
stockholders. 

Spokesmen  for  the  Federal  Railroad  Administration, 
and  especially  the  Director- General  himself,  made  glow- 
ing predictions  as  to  the  economies  that  would  result 
from  unified  operation  of  the  railroads.  There  is  a  strong 
appeal  in  the  argument  for  a  larger  degree  of  co-operation 
in  the  handling  of  our  transportation  facilities.  We  have 
grown  up  under  competitive  conditions.  Yet,  while  cling- 
ing blindly  to  competition  as  our  safeguard  against  op- 
pression, and  resisting  every  proposal  that  looked  to 
agreements  of  any  kind,  we  have  nevertheless  been  slowly 
awakening  to  a  realization  of  the  enormous  wastes  of 
the  competitive  process,  particularly  when  applied  to  in- 
dustries of  this  nature.  It  will  be  profitable,  therefore, 
to  gather  whatever  lessons  are  available  from  the  experi- 
ence of  the  Government  in  its  attempts  at  co-operation, 
although  we  must  always  remind  ourselves  that  the  sit- 
uation was  abnormal  and  that  we  were  fighting  a  war 
and  not  trying  out  economic  experiments  on  their  merits. 

Of  the  many  policies  inaugurated  for  securing  econ- 
omies in  service,  those  which,  according  to  the  estimates 
of  the  Administration,  realized  the  largest  financial  return 
were  the  elimination  of  passenger  service,  the  unification 
of  terminals,  and  the  reduction  in  size  and  expense  of  the 
organizations  of  the  individual  railroads.  That  there 
was  ample  justification  for  elimination  of  passenger  ser- 
vice as  a  war  measure  needs  little  demonstration.  Even 
before  the  war,  there  was  much  unfavorable  comment 
upon  the  duplicate  passenger  service  out  of  the  large  cities, 
particularly  those  of  the  Middle  West,  like  Chicago,  St. 
Louis,  and  St.  Paul.  And  now  when  every  available 
locomotive  and  car  was  needed  either  for  the  handling  of 
food  or  munitions  or  in  transporting  troops  to  the  camps 
and  the  embarkation  points,  and  when  track  room  at 
the  inadequate  terminals  was  at  a  premium,  the  Adminis- 


136  RAILROADS  AND  GOVERNMENT 

tration  was  well  within  its  rights  in  introducing  somewhat 
ruthlessly  a  severe  cut  in  service.  The  saving  appears 
to  have  been  largest  in  the  West  and  Northwest,  where 
passenger  accommodations  had  been  the  most  liberal, 
and  in  the  Eastern  region  where  the  traffic  was  heaviest. 
The  method  followed  was  to  eliminate  duplicate  service, 
and  in  many  cases  to  lengthen  the  schedules  of  limited 
trains  and  impose  upon  them  the  duty  of  handling  local 
traffic.  The  hours  of  trains  on  parallel  lines  were  "stag- 
gered," and  railroad- tickets  were  honored  by  alternative 
routes.  Some  trains  with  light  earnings  were  discon- 
tinued altogether.  In  the  case  of  transcontinental  traffic, 
the  fastest  service  was  assigned  to  the  most  direct  route, 
the  others  being  used  for  local  traffic.  Sleeping-car  ser- 
vice was  much  restricted  and  many  Pullman  facilities 
were  abandoned.  It  was  a  genuine  attempt  to  discourage 
travel.  The  Director- General  estimated  the  annual  sav- 
ing in  passenger  train-miles  as  67,291,000,  or  a  little  over 
10  per  cent  of  the  annual  total  for  the  country.  Some 
of  the  regional  directors  computed  the  saving  at  one 
dollar  per  mile.  The  reduction  in  service  offered  did 
not,  as  was  hoped,  reduce  passenger  travel,  which  was 
8  per  cent  greater  in  1918  than  in  1917,  and  was  con- 
tinuing to  increase  in  1919. 

That  the  policy  resulted  in  very  appreciable  incon- 
venience and  discomfort  to  the  travelling  public  was 
evident,  although  such  consequences  were  insignificant 
when  compared  with  those  suffered  in  England  and  on 
the  Continent.  They  were  borne  generally  with  cheer- 
fulness as  a  war  measure.  That  the  Administration  was 
fully  alive  to  the  situation  is  shown  by  the  fact  that  upon 
the  signing  of  the  armistice  the  restoration  of  passenger 
service  began,  and  by  the  end  of  June  1919,  there  had 
been  restored  11,462,000  of  the  train-miles  of  which  the 
people  had  previously  been  deprived.  By  the  end  of 
1920,  service  had  returned  virtually  to  the  pre-war  basis, 


FEDERAL  OPERATION  137 

and  the  old  rivalry  of  speed,  the  cutting  down  of  run- 
ning time,  had  begun  to  show  itself  again  on  many  roads. 

It  is  necessary  under  either  system  of  control,  whether 
Government  or  private,  that  the  public  should  be  served 
adequately  with  a  comfortable  and  convenient  passenger 
service.  It  is  politically  necessary.  This  form  of  service 
touches  the  individual  personally  as  the  freight  service 
does  not,  and  governments  owning  railroads  have  recog- 
nized the  strategic  importance  of  low  rates  and  good  ser- 
vice in  the  passenger  department.  But  this  does  not 
require  that  offerings  of  service  be  carried  to  the  extreme 
that  is  found  in  the  United  States,  where  in  many  sec- 
tions the  competition  to  meet  the  desires  of  the  traveller 
is  so  great  that  the  operations  in  many  cases  produce  no 
profit  at  all.  In  such  cases  a  part  of  the  burden  of  ex- 
pense is  actually  thrown  upon  the  freight  service.  It 
has  been  commonly  maintained  that  any  agreement  be- 
tween roads  to  adjust  passenger  schedules  would  be  a 
violation  of  the  Anti-Trust  Act.  There  is  doubt  whether 
the  Supreme  Court,  in  view  of  its  recent  decisions  as  to 
what  constitutes  restraint  of  trade,  would  so  hold.  But 
even  if  the  court  did  not  interfere,  it  is  not  at  all  clear 
that  the  roads  would  take  advantage  of  the  opportunity 
to  cut  down  their  passenger- train  service.  Each  desires 
to  enjoy  the  advertising  value  that  comes  from  schedul- 
ing a  train  at  the  popular  hour  of  the  day  and  would  not, 
except  in  times  of  great  economic  necessity,  be  inclined 
to  yield  this  advantage  readily  to  a  rival.  Yet  in  this 
regard  as  in  respect  to  other  co-operative  policies  to  be 
discussed,  the  public  is  vitally  interested  in  seeing  to  it 
that  it  pays  only  for  that  service  which  is  socially  desir- 
able. 

In  the  unification  of  terminal  facilities,  the  opportuni- 
ties for  radical  economies  were  not  so  abundant  as  in  the 
reduction  of  passenger  service.  While  many  of  the  com- 
petitive practices  were  done  away  with,  the  physical  bar- 


138  RAILROADS  AND  GOVERNMENT 

riers  to  a  thorough  unification  could  not  be  removed. 
The  growth  in  population  and  the  increase  in  land  values 
have  intensified  a  situation  which  was  essentially  uneco- 
nomic and  unscientific  from  the  beginning,  and  which  is 
due  to  the  competitive  and  individualistic  character  of 
our  railroad  development.  On  the  side  of  passenger  ser- 
vice, the  most  striking  case  of  unification  was  the  open- 
ing of  the  Pennsylvania  terminal  in  New  York  to  the 
use  of  the  Baltimore  and  Ohio  and  the  Lehigh  Valley 
Railroads,  a  step  which  amply  justified  itself,  and  which 
has  been  continued  to  the  present  time. 

For  the  control  of  freight  traffic,  terminal  managers 
were  appointed  at  all  important  points.  While  the  ac- 
tual physical  reconstruction  of  terminals  was  of  course 
impossible,  there  was  opportunity  for  saving  in  switch- 
ing costs,  and  consequently  in  time  consumed  in  handling. 
Efforts  were  made  to  route  traffic  so  as  to  insure  delivery 
with  the  minimum  of  switching,  and  when  switching 
was  required,  to  confine  the  service  to  as  few  carriers  as 
possible.  It  was  found,  for  example,  that  in  some  cases 
in  the  Chicago  terminal  as  many  as  nineteen  different 
railroads  were  serving  one  plant  or  district  solely  as  a 
result  of  competition.  Not  only  was  switching  saved, 
but  also  economies  were  made  through  the  unification 
of  inspection  and  repair  forces.  Better  organization  of 
the  terminals  materially  increased  the  capacity  of  the 
roads  using  them,  for  it  lessened  congestion,  reduced  de- 
lays, facilitated  interchange,  reduced  empty-car  mileage, 
and  increased  the  car-supply. 

Detailed  estimates  of  the   saving  made   by  regional 
directors  must  be  accepted  with  caution.    For  such  sav- 
ings can  be  only  roughly  approximated,  and  they  were 
I  made  upon  a  bald  money  basis  without  any  regard  to 
I  the  cost  of  the  savings  in  the  disservice  suffered  by  ship- 
pers.    This  latter  consideration  would  necessarily  have 
weight  in  any  plan  for  permanent  unification  of  terminal 


FEDERAL   OPERATION  139 

operation.  With  the  return  of  the  roads  to  their  owners 
most  of  the  joint  terminal  operations  created  by  the  Gov- 
ernment were  abandoned. 

The  weakest  point  in  our  present  operating  machine 
is  found  in  the  state  of  the  terminal  facilities,  a  condition 
growing  rapidly  more  serious  with  the  increase  in  popu- 
lation and  the  lack  of  available  space.  It  is  a  compara- 
tively simple  problem  to  increase  trackage  on  the  line, 
but  the  benefit  of  such  increase  is  altogether  neutralized 
if  cars  cannot  be  handled  expeditiously  at  terminals.  It 
may  happen  that  additional  business  is  taken  on  at  an 
actual  loss  because  this  additional  traffic  slows  up  the 
entire  service  and  creates  congestion  and  stagnation. 
The  result  of  the  pressure  of  competition  among  traffic 
men  has  been  to  speed  up  the  loading  of  cars,  the  getting 
of  business  on  to  the  rails,  without  regard  to  the  question 
of  prompt  delivery.  The  accent  both  in  law  and  practice 
has  been  upon  the  acceptance  of  freight  for  transport  by 
the  common  carrier  rather  than  upon  its  final  delivery. 
Hence,  cars  have  been  pushed  forward  to  connections 
and  into  terminals  with  little  regard  to  the  ability  of  the 
terminal  to  receive  and  handle  them  with  despatch.  The 
only  relief  heretofore  has  been  the  resort  by  terminal  roads 
to  the  crude  and  unsatisfactory  method  of  embargoes, 
which  have  simply  forced  the  congestion  back  along  the 
line,  and  have  produced  wave-like  movements  of  traffic 
difficult  to  handle.  This  situation  was  greatly  aggravated 
during  the  war  by  the  fact  that  shippers  on  foreign  con- 
tract usually  received  the  proceeds  of  their  sale  as  soon 
as  the  goods  were  loaded  on  cars  for  shipment. 

Under  federal  operation,  the  so-called  "permit  sys- 
tem" was  introduced.  At  first  it  was  made  applicable 
only  to  traffic  essential  for  the  war.  Later  it  was  extended 
more  widely.  Under  this  system  a  carrier  could  not  ac- 
cept traffic  without  a  permit  from  the  Car  Service  Bureau, 
and  the  issuance  of  the  permit  was  dependent  upon  the 


140  RAILROADS  AND  GOVERNMENT 

ability  of  the  consignee  to  accept  and  unload  the  freight 
without  car  delay.  This  system,  in  the  management  of 
which  all  Government  departments  co-operated,  alone 
made  possible  the  handling  of  the  immense  war  traffic 
without  congestion.  All  War  and  Navy  Department 
shipments  were  handled  on  a  permit  basis.  All  export 
traffic  via  Atlantic,  Gulf,  and  Pacific  ports  was  handled 
in  this  manner,  and  the  system  was  applied  during  the 
war  to  domestic  shipments  to  Philadelphia,  New  York, 
and  Baltimore.  Wheat  and  hog  shipments  to  primary 
markets  were  thus  stabilized.  The  U.  S.  Railroad  Ad- 
ministration declared  that  the  operation  of  the  permit 
system  made  it  possible  to  keep  the  heavy  export  busi- 
ness moving  through  the  ports,  keep  the  coal  for  tide- 
water and  lake  trans-shipment  under  control,  move  the 
heavy  grain  crop  in  an  orderly  manner,  and  at  the  same 
time  handle  a  maximum  volume  of  other  business,  through 
the  avoidance  of  congestion  and  the  freeing  for  other 
loading  of  cars,  power,  and  facilities  which  would  not 
otherwise  have  been  available.  Such  a  device  might 
well  become  a  part  of  our  normal  operating  system.  Its 
value  has  been  recognized  by  railroad  executives  but, 
naturally  enough,  it  has  not  met  with  the  enthusiastic 
indorsement  of  shippers.  They  regard  it  as  only  an  em- 
bargo under  another  name  and  an  opportunity  for  serious 
discrimination.  They  take  the  position  that  it  is  the 
business  of  the  railroad  to  transport  and  deliver,  and  that 
inability  to  do  this  at  any  particular  time  should  not  work 
to  deprive  the  shipper  of  the  right  to  ship. 

The  Administration  also  undertook  to  co-ordinate  the 
marine  departments  of  the  different  railroads,  and  to 
use  all  piers  regardless  of  ownership.  An  Exports  Con- 
trol Committee  was  set  up  with  power  to  determine  the 
ports  to  which  traffic  should  be  hauled,  and  the  permit 
system  was  employed  to  prevent  the  shipment  of  goods 
to  any  port  until  there  was  a  practical  certainty  that 


FEDERAL   OPERATION  141 

ships  would  be  promptly  available.  The  war  did  not 
last  long  enough  to  give  this  committee  the  opportunity 
to  make  its  influence  felt  in  any  large  way  on  the  traffic 
of  the  country.  But  its  efforts  point  the  direction  in 
which  we  should  now  move.  We  are  not  making  the 
best  use  of  our  port  and  steamship  facilities;  congestion 
and  blockade  are  all  too  familiar  phenomena  in  normal 
times.  The  whole  problem  of  port  facilities  and  their 
relationship  to  inland  transportation  has  received  too 
little  attention. 

The  third  " economy"  upon  which  Director-General 
McAdoo  laid  stress  was  that  of  the  elimination  of  high- 
salaried  executives,  which  was  to  bring  about  an  annual 
saving  of  $4,600,000.  This  had  a  wide  popular  appeal, 
and  seems  to  have  been  put  in  the  foreground  of  the  pro- 
gramme largely  because  of  that  fact.  The  greater  part 
of  the  officers  released  by  the  Railroad  Administration 
from  active  operating  duties  retained  their  salaried  re- 
lationships with  their  own  corporations,  and  the  aggregate 
administrative  expense  continued  as  before.  So  far  it 
was  a  matter  of  bookkeeping  only.  But  it  later  developed 
that  if  efficiency  in  executive  positions  was  to  be  obtained, 
salaries  somewhat  approaching  those  paid  in  other  fields 
must  be  offered.  A  report  of  January  i,  1919,  showed 
that  five  of  the  seven  regional  directors  were  receiving 
$50,000  annual  salary  and  the  other  two  $40,000,  and 
that  in  addition  to  the  regional  directors  seventeen 
operating  officials  were  receiving  $20,000  or  more.  Even 
at  these  salaries,  the  officials  assumed  their  positions 
at  large  financial  sacrifice  and  wholly  for  patriotic  rea- 
sons. The  entire  estimated  saving  in  any  case  was  not 
over  one-tenth  of  i  per  cent  of  the  operating  expenses,  and 
would  have  been  hardly  worthy  of  mention  but  for  the 
political  use  to  which  it  was  put. 

The  other  operating  policies  of  the  Railroad  Adminis- 
tration upon  which  less  stress  was  laid  may  be  disposed 


142  RAILROADS  AND  GOVERNMENT 

of  in  more  summary  fashion.  Short-routing  of  freight 
to  avoid  unnecessary  mileage  was  urged  from  the  begin- 
ning, and  was  attempted  in  all  regions.  General  Order 
No.  i  of  the  Federal  Railroad  Administration  instructed 
railroad  managers  to  disregard  shippers'  routing  of  freight 
whenever  speed  and  efficiency  would  be  promoted  there- 
by, thus  setting  aside  a  privilege  which  had  been  granted 
to  shippers  by  law.  Traffic  agreements  among  carriers 
were  not  to  be  permitted  to  interfere  with  expedition. 
Shippers  whose  interest  was  in  the  shortest  distance  be- 
tween points,  now  that  traffic  solicitors  had  disappeared, 
assisted  the  campaign.  In  fact,  in  some  regions  the  sav- 
ings by  voluntary  action  of  the  shippers  were  greater 
than  those  made  by  the  railroads  themselves.  But  the 
result  in  many  cases,  especially  in  the  East,  was  to  congest 
the  direct  lines  and  compel  the  diversion  of  traffic  to 
the  more  roundabout  routes.  In  some  cases  where  paral- 
leling lines  existed,  all  of  the  traffic  of  a  certain  kind,  such 
as  coal,  was  routed  over  a  specific  line,  thus  promoting 
efficiency  in  handling  by  reducing  variety.  Routing  was 
also  worked  out  to  take  advantage  of  ruling  grades  and 
to  avoid  congested  population  centres.  No  satisfactory 
estimate  of  the  savings  can  be  or  was  made.  Such  figures 
as  were  presented  by  the  operating  officials  were  so 
crudely  approximate  as  to  be  practically  worthless. 
Moreover,  even  accepting  the  aggregate  saving  in  car 
miles  as  estimated,  it  represented  in  any  particular  region 
but  a  fraction  of  i  per  cent  of  the  total  car  miles  trav- 
elled. 

The  "sailing-day  plan,"  under  which  less- than-car-load 
freight  was  assembled  in  solid  cars  and  despatched  with- 
out transfer  to  destination,  was  widely  introduced,  but 
not  without  protests  from  shippers  in  some  sections,  who 
felt  that  their  privileges  were  being  curtailed.  They 
protested  against  being  obliged  to  bring  their  traffic  to 
the  freight-station  on  designated  days  only,  and  to  ship 


FEDERAL   OPERATION  143 

it  only  by  designated  routes,  and  they  insisted  that  in 
some  centres  it  worked  to  discriminate  against  them  and 
in  favor  of  competitors  who  were  not  subject  to  these 
limitations.  Better  loading  of  cars  and  trains,  begun 
under  the  Railroads'  War  Board,  was  continued  with 
the  invaluable  aid  of  the  various  Government  agencies. 
Shippers  contributed  to  this  campaign  not  alone  from 
patriotic  motives  but  because  they  felt  the  necessity  of 
making  full  use  of  their  limited  supply  of  cars.  Solid 
trains  were  routed  direct  from  origin  to  destination,  ex- 
pediting traffic  and  saving  yard  expense.  The  service 
was  applied  most  extensively  to  traffic  in  flour  and  grain, 
lumber,  fruit,  packing-house  products,  live  stock,  cotton, 
and  oil.  However,  the  statistics  of  loading,  particularly 
for  the  Eastern  region,  were  materially  affected  by  the 
extent  of  empty-car  mileage  westbound,  which  the  war 
exigencies  forced  upon  the  management.  So  far  as  was 
possible,  the  " permit  system"  was  used  as  a  weapon  to 
enforce  full  return  loads.  These  two  methods  of  econo- 
mizing operation — the  solid  train-load  and  the  sailing- 
day  plan — had  long  been  recognized  by  railroad  man- 
agements as  desirable,  and  some  of  them  had  put  the 
practices  into  effect  before  the  war.  But  it  is  evident 
that  under  competitive  conditions  and  under  the  pressure 
that  can  be  brought  to  bear  by  shippers,  it  is  impossible 
in  normal  times  to  introduce  such  practices  to  any  satis- 
factory degree,  except  on  roads  whose  traffic  is  large  and 
assured.  No  road  is  willing  to  see  its  traffic  drift  away 
to  a  rival  while  it  is  waiting  for  a  full  load.  It  is  not  sur- 
prising, therefore,  that  this  operating  economy  should 
have  largely  disappeared  with  the  end  of  federal  control. 
In  fact,  the  sailing-day  plan  as  a  federal  policy  went  by 
the  board  as  early  as  April  1919. 

Unification  of  facilities  for  war  purposes  had  its  best 
exemplification  in  the  matter  of  equipment.  The  car 
and  locomotive  supply  was  located  and  relocated  with 


144  RAILROADS  AND  GOVERNMENT 

entire  disregard  of  ownership,  payments  for  the  use  of 
foreign  cars  were  eliminated,  and  equipment  of  all  kinds 
was  repaired  in  the  most  accessible  and  least  congested 
shop.  From  the  very  beginning  of  through  traffic  in  the 
sixties  and  seventies  of  the  nineteenth  century,  freight- 
cars  had  moved  freely  from  road  to  road  in  order,  so  far 
as  possible,  to  carry  their  load  to  destination  without 
transfer.  But  the  system  had  never  worked  with  entire 
satisfaction  to  all  managements,  and  various  devices  had 
been  tried  in  the  way  of  penalties  to  induce  prompt  re- 
turn of  cars  to  the  home  road.  There  have  been  many 
advocates  of  the  pooling  plan,  under  which  each  road 
would  contribute  a  certain  number  of  cars  of  a  non-spe- 
cialized type  for  through  traffic  to  a  common  supply,  or 
under  which  the  car-supply  for  through  traffic  would  be 
handled  by  a  separate  organization,  as  in  the  case  of  sleep- 
ing-car equipment.  Such  plans  have  more  than  once 
nearly  reached  a  realization,  but  have  in  each  case  been 
defeated  by  the  individualistic  attitude  of  a  few  roads. 
So  far  as  locomotives  are  concerned,  it  has  never  been  the 
practice  to  send  them  beyond  their  own  lines.  The  neces- 
sity for  frequent  overhauling  and  constant  inspection, 
and  the  fact  that  they  have  been  designed  to  meet  phys- 
ical conditions  on  their  own  roads,  have  made  pooling 
of  locomotives  impracticable.  The  results  of  the  extreme 
application  of  the  pooling  system  forced  by  the  war  emer- 
gency were  observable  as  the  period  of  federal  operation 
drew  toward  its  close.  Equipment  needed  by  Eastern 
roads  for  their  specific  kind  of  traffic,  such  as  coal-cars, 
was  largely  in  the  West,  and  the  box-car  equipment  that 
Western  grain  roads  required  was  on  the  Eastern  lines. 
Moreover,  maintenance  adequate  for  normal  times  was 
possible  only  when  equipment  was  handled  by  the  owner 
in  the  home  shop.  Three  months  before  the  end  of  fed- 
eral control,  the  Director-General  ordered  the  return  of 
cars  to  the  home  road,  and  this  movement  then  begun 


FEDERAL  OPERATION  145 

continued  as  rapidly  as  conditions  permitted.  The  nor- 
mal proportion  of  cars  on  home  roads  is  about  50  per  cent. 
After  a  year  of  federal  operation  it  had  fallen  to  a  little 
over  25  per  cent.  By  the  end  of  1920  it  had  recovered 
to  33  per  cent.  There  is  no  evidence  that  the  railroads 
have  any  desire  to  continue  the  pooling  plan,  and  there 
is  no  compulsion  upon  them  to  do  so  except  in  times  of 
"shortage  of  equipment,  congestion  of  traffic  or  other 
emergency,"  when  the  Commission,  under  the  recent 
legislation,  has  power  to  disregard  ownership  of  equip- 
ment, and  make  such  directions  with  respect  to  car-ser- 
vice as  will  best  promote  the  public  interest. 

The  coal-zoning  plan,  introduced  primarily  to  meet 
the  fuel  shortage,  was  effective  in  eliminating  a  large 
waste  in  transportation,  although  it  necessitated  a  serious 
readjustment  in  markets  that  were  accustomed  to  cer- 
tain grades  of  coal,  and  were  by  this  plan  now  obliged 
to  resort  to  substitutes.  This  was  abolished  February 
i,  1919.  An  increase  in  demurrage  rates,  almost  to  a  pro- 
hibitive point,  was  put  into  force  to  speed  up  the  unload- 
ing of  cars.  Through  interline  way-billing  was  extended 
beyond  anything  in  use  before,  and  reconsignment  and 
similar  privileges  that  cause  delay  were  largely  elimi- 
nated. A  system  of  store-door  delivery  of  package  freight 
was  introduced  in  New  York  and  Philadelphia  to  re- 
lieve the  terminal  congestion.  The  Car  Service  Sec- 
tion secured  to  some  degree  in  the  summer  months  of 
1918  the  advance  movement  of  important  raw  materials 
to  avoid  a  possible  congestion  in  the  fall,  but  the  unfavor- 
able business  situation  of  the  following  year  brought  this 
programme  to  an  end.  Finally,  as  factors  contributing 
in  an  indirect  way  to  the  campaign  for  economical  freight 
operation,  there  may  be  mentioned  the  steps  taken  to 
consolidate  and  simplify  freight  tariffs,  and  the  comple- 
tion of  the  huge  job  long  under  way  before  the  war,  of 
a  uniform  freight  classification  which  was  submitted  to 


146  RAILROADS  AND  GOVERNMENT 

the  Commission,  but  did  not  reach  the  point  of  practical 
application. 

In  the  passenger  field  the  project  which  was  looked 
upon  with  the  greatest  satisfaction  by  the  Administration 
was  that  of  the  consolidated  ticket  office.  The  number 
of  these  was  108  at  the  end  of  1919,  replacing  between 
500  and  600  offices  previously  in  existence.  It  was 
claimed  that  the  convenience  to  travellers  in  the  com- 
bination of  Pullman  and  ticket  offices,  and  in  the  oppor- 
tunity to  decide  between  alternative  routes  with  a  mini- 
mum of  inconvenience,  constituted  a  service  that  the 
public  would  demand  as  a  permanent  feature.  All  that 
can  be  said  for  it  at  present  is  that  it  has  persisted  longer 
than  almost  any  other  of  the  war  innovations.  Once  old 
leases  have  been  disposed  of,  it  means  a  very  tangible 
saving  in  expense  through  reduction  in  rental.  Whether 
the  savings  are  sufficient  to  offset  the  loss  of  individuality 
and  the  advertising  value  of  a  separate  establishment  is 
a  question  that  each  road  is  deciding  for  itself.  At  the 
beginning  of  1921,  the  consolidated  office  was  in  opera- 
tion in  whole  or  in  part  in  a  considerable  number  of  the 
larger  cities.  In  Chicago,  three  out  of  twenty-two  roads 
had  withdrawn  to  set  up  separate  agencies.  Where  the 
union  office  still  prevails,  there  is  a  tendency  to  resurrect 
the  identity  of  the  individual  road  inside  the  office  and 
to  direct  travel  to  the  proper  desk  within  the  building 
by  vigorous  solicitation  outside.  Whether  or  not  the 
union  ticket  office  is  legal  under  the  Anti-Trust  Act  is  a 
matter  of  dispute  among  railroad  men.  In  the  Union 
Pacific-Southern  Pacific  merger  case,  the  prosecuting 
officers  attached  much  importance  to  the  consolidation 
of  ticket  offices  as  infractions  of  the  law,  and  after  dis- 
solution all  consolidated  offices  were  abandoned.  But 
it  is  probable  that  in  this  case  the  Government  attorneys 
were  examining  outward  signs  of  a  more  significant  in- 
ward agreement,  and  that  the  joint  ticket  office  would  not 


FEDERAL   OPERATION  147 

in  itself  have  been  considered  a  restraining  combination. 
Certainly  if  the  individual  corporate  units  are  preserved, 
the  fact  that  they  all  reside  under  one  roof  can  be  no  more 
illegal  than  the  annual  automobile  show.  This  would 
seem  to  be  a  case  where  the  railroads  have  raised  a  legal 
doubt  for  the  purpose  of  stopping  them  from  doing  what 
they  did  not  in  any  case  wish  to  do.  Other  unification 
policies  in  passenger  service  included  the  introduction 
of  a  universal  mileage  book,  standard  ticket  forms  and 
baggage  rules,  and  the  abridgment  of  time-tables.  At- 
tempts to  standardize  dining-car  service  struck  at  the 
very  heart  of  individualism,  and  the  results  were  not 
altogether  successful. 

Advertising  and  all  work  for  the  stimulation  of  traffic 
was  stopped  under  federal  operation  except  that  which 
concerned  itself  with  agricultural  development.  A  sharp 
decline  in  traffic  after  the  war  ended  forced  .the  Adminis- 
tration into  a  campaign  of  advertising  to  stimulate  travel. 
With  the  return  of  the  roads  to  their  owners,  the  man- 
agements felt  keenly  the  necessity  of  active  campaigns 
to  restore  their  traffic  diverted  under  war  necessities.  In 
view  of  the  serious  financial  condition  of  the  railroads,  ad- 
vertising and  traffic  development  plans  have  been  worked 
out  with  more  care  as  to  their  immediate  effect,  and 
waste  has  been  carefully  avoided.  Closer  contact  is  being 
developed  between  the  railroad  and  the  shipper.  The 
prompt  closing  of  "off-line"  freight  offices  by  the  federal 
administration  seemed  natural  in  view  of  the  fact  that 
they  were  primarily  soliciting  agencies  in  a  competitive 
market.  But  it  was  discovered  later  that  they  had  been 
of  material  service  to  shippers  in  a  variety  of  ways  that 
had  to  do  with  information  concerning  rates  and  ship- 
ments. No  satisfactory  substitute  for  this  personal  re- 
lationship was  developed  during  federal  control. 

To  promote  uniformity  in  operation,  there  was  created 
an  Operating  Statistics  Section  which  was  to  do  for  opera- 


148  RAILROADS  AND  GOVERNMENT 

tion  what  the  Interstate  Commerce  Commission  had 
done  for  accounting.  It  was  to  decide  upon  operating 
statistical  standards  and  make  them  effective  and  to 
analyze  and  disseminate  operating  results.  Its  purpose 
was  to  make  use  of  all  the  operating  statistical  data  pre- 
pared for  the  Interstate  Commerce  Commission,  and  to 
require  such  additional  information  as  was  essential  to 
a  complete  exhibit  of  physical  performance  and  of  unit 
costs  of  operation.  Its  plan  for  the  standardization  of 
statistical  practice  was  made  effective  on  August  i, 
1918,  and  its  work  was  developed  with  such  efficiency 
that  its  standards  and  reports  have  found  a  permanent 
place  in  railroad  administration.  Eight  standardized 
monthly  reports  were  required  from  Class  I  roads  (those 
having  operating  revenues  in  excess  of  $1,000,000  per 
annum)  covering  such  data  as  freight  and  passenger 
train  performance,  locomotive  and  car  performance, 
locomotive  and  train  costs,  and  the  distribution  of  loco- 
motive hours.  It  is  of  especial  note  that  statistics  of 
car  and  locomotive  performance  place  much  more  stress 
than  was  ever  laid  before  upon  the  time  element  in  equip- 
ment performance,  a  most  significant  factor  in  a  final 
determination  of  operating  efficiency.  While  much  of 
the  material  had  been  gathered  by  roads  for  many  years, 
there  had  been  no  uniformity  in  method  or  in  the  meaning 
of  the  figures.  It  is  now  possible  to  compare  operating 
results  on  the  various  roads  without  qualification  for 
differences  in  methods  of  accumulating  data  and  com- 
puting units  and  averages.  As  a  result  of  the  wide  dis- 
tribution of  the  summarized  reports,  railroad  officers 
know  much  more  than  they  did  before  about  their  rela- 
tive performance  and  many  know  more  about  their  own 
operations.  In  fact,  officers  on  many  of  the  larger  roads 
are  now  requiring  similar  data  and  comparisons  for  the 
different  operating  divisions  of  their  systems.  The 
effect  of  this  statistical  work,  while  not  measurable  with 


FEDERAL   OPERATION  149 

any  accuracy,  is  distinctly  in  the  direction  of  an  awakened 
and  more  intelligent  interest  in  the  efficiency  of  opera- 
tion.1 

In  the  Division  of  Accounting  considerable  saving  was 
effected  in  consequence  of  the  unification  of  operations. 
Car  hire  was  eliminated  and  all  accounting  therefor 
went  with  it.  Much  simplification  was  introduced  into 
the  car-repair  and  joint-facility  accounts.  Much  of  the 
controversy  oyer  interline  apportionments  and  freight 
claims  was  eliminated.  Yet  it  is  obvious  that  the  sav- 
ings were  meagre  in  comparison  with  what  would  be  made 
under  a  permanent  system  of  unified  management.  It 
was  an  interim  period.  It  was  not  desirable  to  break 
the  series  of  accounting  and  statistical  reports  prepared 
by  the  Commission.  The  contract  with  the  Government 
necessitated  the  maintenance  of  accounting  identity. 
Two  sets  of  books  had  to  be  kept,  and  much  new  labor 
was  involved  in  following  up  the  many  details  of  the 
contract.  This  was  all  incidental  to  the  temporary- 
lease,  and  hampered  the  Division  in  making  the  show- 
ing in  economies  that  it  might  under  other  conditions 
have  been  capable  of  doing. 

In  the  field  of  maintenance  many  practices  were  stand- 
ardized and  the  principles  of  unification  introduced.  Lo- 
comotive repair-shops  were  pooled  regardless  of  owner- 
ship, thus  reducing  distance  to  which  locomotives  were 
sent  for  repairs  and  the  time  they  were  out  of  service. 
Standard  practice  was  introduced  in  many  phases  of 
maintenance  and  inspection,  and  the  policy  of  inspection 
was  extended  to  take  the  place  of  commercial  insurance, 
which  was  abolished.  Joint  purchase  of  supplies  was 
undertaken  wherever  possible.  The  most  sweeping  inno- 

1  For  more  detailed  discussion  of  the  statistical  practice,  see  article 
by  William  J.  Cunningham,  who  is  responsible  for  the  development  of 
the  plan,  in  Annals  American  Academy,  November  1919,  entitled 
"The  Accomplishments  of  the  United  States  Railroad  Administration 
in  Unifying  and  Standardizing  the  Statistics  of  Operation." 


150  RAILROADS  AND   GOVERNMENT 

vation  and  the  one  which  met  with  the  strongest  opposi- 
tion was  the  introduction  of  standardization  into  the 
manufacture  of  locomotives  and  cars.  The  Director- 
General,  in  his  seven  months'  report  of  September,  1918, 
stated  that  there  were  said  to  be  prior  to  the  war  2,023 
different  styles  of  freight-cars,  and  almost  as  many  of 
locomotives.  At  the  time  of  his  report,  twelve  standard 
/types  of  freight-cars  had  been  decided  upon,  and  six  types 
/of  locomotives  in  two  weights.  With  interchangeable 
parts,  it  was  expected  that  these  relatively  few  types 
could  be  more  rapidly  repaired,  particularly  when  off 
their  own  lines,  and  that  the  stock  of  repair  parts  could 
be  reduced.  Moreover,  it  had  already  been  demonstrated 
that  the  speed  in  production  of  new  equipment  was  ma- 
terially increased.  Aside  from  the  natural  opposition  of 
the  locomotive  and  car  builders  to  this  policy,  there  were 
many  expert  railroad-maintenance  engineers  who  felt  that 
the  policy  of  standardization  had  been  carried  too  far, 
and  that  many  roads  were  consequently  unable  to  se- 
cure the  equipment  adapted  to  their  peculiar  needs. 
This  was  particularly  the  case  with  locomotives,  which 
to  be  efficient  must  be  adapted  to  the  many  local  condi- 
tions of  physical  plant  and  operating  methods,  such  as 
alignment  and  grades,  nature  of  fuel,  strength  of  bridges, 
weight  of  track,  and  capacity  of  roundhouses,  turn- 
tables, and  sidings.  Efficiency  in  operation  had  been 
sacrificed  to  efficiency  in  production.  Probably  the 
reasonable  policy  lay  somewhere  between  the  two  ex- 
tremes. While  experimentation  should  be  sufficiently 
encouraged  to  assure  a  steady  development  in  efficiency 
of  equipment  types,  and  the  railroads  should  be  free  to 
order  those  types  that  are  best  suited  to  their  needs, 
the  public  should  not  be  asked  to  bear  the  burden  of 
all  the  variations  from  standard  that  the  ingenuity  of 
builders  can  devise,  and  induce  the  railroads  to  pur- 
chase. 


FEDERAL   OPERATION  151 

There  was  less  opposition  to  the  standardization  of  the 
freight- car.  In  fact,  many  of  the  larger  roads  had  been 
pursuing  this  policy  for  years,  and  the  influence  of  such 
national  organizations  as  the  Master  Car  Builders'  Asso- 
ciation had  been  in  the  same  direction.  It  is  only  neces- 
sary to  recall  the  assistance  of  this  organization  in  the 
establishment  by  the  Interstate  Commerce  Commission 
of  safety  standards,  beginning  with  the  automatic  coupler 
and  air-brake  nearly  thirty  years  ago,  to  realize  that 
standardization  is  no  new  problem  in  the  design  of  rail- 
road equipment.  Freight-cars  travel  freely  about  the 
country,  whereas  locomotives  seldom  leave  the  home 
line.  Cars  must  receive  at  least  emergency  repairs 
wherever  they  happen  to  be.  There  is  a  large  saving 
in  time  and  expense  if  cars  and  repair  parts  can  be  stand- 
ardized, at  least  in  the  case  of  equipment  that  travels 
most  widely  and  is  not  limited  to  the  carrying  of  special 
traffic  in  particular  sections. 

The  controversy  in  which  the  most  acute  differences  of 
opinion  arose  between  the  railroad  corporations  and  the 
federal  administration  related  to  the  equipment  ordered 
by  the  Director- General  in  accordance  with  the  types 
determined  upon  and  allocated  to  the  different  railroad 
systems.  The  Administration  ordered  1,930  locomotives 
and  100,000  freight-cars.  No  passenger-cars  of  any  sort 
were  purchased.  This  was  in  1918,  no  orders  being 
placed  in  1919  because  of  the  uncertainty  as  to  the  date 
of  termination  of  federal  control.  Most  of  the  loco- 
motives were  accepted,  but  vigorous  protest  was  raised 
against  the  allocation  of  cars.  Many  roads  insisted  that 
the  equipment  was  not  adapted  to  their  needs  and  they 
all  objected  to  taking  and  paying  for  equipment  at  war 
prices  which  would  later  have  to  be  written  down  to  a 
lower  price  level.  This  controversy  is  one  of  the  main 
issues  in  the  final  adjustment  of  the  compensation  be- 
tween the  roads  and  the  Government. 


152  RAILROADS   AND   GOVERNMENT 

Two  other  steps  involving  far-reaching  consequences 
in  the  direction  of  unification  were  taken,  those  relating 
to  the  express  companies  and  to  the  waterways.  With 
the  express  companies  each  railroad  had  a  separate  con- 
tract, and  these  contracts  varied  widely  in  their  stipula- 
tions concerning  the  handling  of  different  kinds  of  traffic. 
There  was  necessity  for  a  uniform  contract  applicable 
over  the  entire  railroad  net.  Accordingly,  a  corporation 
known  as  the  American  Railway  Express  Company  was 
created  to  take  over  the  existing  companies  during  the 
period  of  federal  control.  With  this  new  corporation  the 
Railroad  Administration  made  a  contract1  in  June  1918, 
which  contained  an  agreement  for  division  of  income  that 
in  a  way  foreshadowed  the  provision  of  the  Transportation 
Act  of  1920  for  the  distribution  of  railroad  net  revenue. 
Of  its  gross  transportation  revenue,  the  express  company 
was  to  turn  over  to  the  Director- General  50.25  per  cent, 
which  was  the  average  for  the  previous  ten  years  of  the 
payments  by  the  express  companies  to  the  railroads.  Out 
of  the  balance,  enhanced  by  the  earnings  upon  roads  not 
under  federal  control  and  by  income  derived  from  other 
sources  than  transportation,  the  express  company  was  to 
defray  its  expenses,  rentals,  and  taxes.  From  any  bal- 
ance remaining,  it  reserved  5  per  cent  for  a  capital  stock 
dividend.  The  next  2  per  cent  on  the  par  value  of  the 
stock  was  to  be  divided  equally  between  the  company 
and  the  Government,  the  company's  portion  being  used 
for  dividends  or  general  corporate  purposes,  and  any 
remainder  was  to  be  used  to  accumulate  a  guarantee 
fund  of  10  per  cent  on  the  capital  stock  to  insure  sta- 
bility of  dividends.  Any  income  in  excess  of  that  needed 
for  the  guarantee  fund  was  to  be  divided  upon  a  some- 
what complicated  basis  between  the  company  and  the 
Government,  in  which  the  latter  got  the  larger  share. 
Moreover,  when  at  the  end  of  the  contract  the  guarantee 

1  U.  S.  Railroad  Administration  Bulletin  No.  4  (revised),  page  85. 


FEDERAL   OPERATION  153 

was  distributed,  the  Director-General  became  the  bene- 
ficiary to  the  extent  of  three-fifths  thereof.  By  presi- 
dential proclamation  the  American  Railway  Express 
Company  was  taken  possession  of  on  November  16, 
1918,  with  the  proviso  that  the  Director- General  might 
at  his  discretion  continue  the  operation  of  the  company 
under  the  contract  of  the  previous  June.  Express  matter 
was  thereafter  sent  by  the  most  direct  route  and  express- 
cars  were  utilized  without  regard  to  ownership. 

By  the  Federal  Control  Act  the  President  was  author- 
ized to  expend  from  the  revolving  fund  what  he  deemed 
necessary  or  desirable  for  the  utilization  and  operation 
of  canals,  and  the  purchase  or  construction  and  opera- 
tion of  equipment  on  inland  and  coastwise  waterways. 
A  Marine  Department  was  created  under  the  Railroad 
Administration.  Because  of  the  requisitioning  by  the 
Government  of  a  large  amount  of  coastwise  tonnage  for 
war  purposes,  the  remaining  private  lines  were  disposed 
to  accept  only  the  most  profitable  tonnage,  and  an  addi- 
tional burden  was  in  consequence  thrown  on  the  rail- 
roads. Accordingly,  the  Railroad  Administration  not 
only  took  over  all  railroad-owned  steamships  but  also, 
under  the  President's  war  powers,  fifty-one  ships  belong- 
ing to  four  private  companies.  These  private  vessels 
were  returned  to  their  owners  after  the  armistice.  In 
April  1918,  the  New  York  Barge  Canal  Section  was 
created,  and  the  leasing  and  construction  of  equipment 
was  undertaken.1  In  July  the  Cape  Cod  Canal  was  taken 
over  to  provide  an  inside  waterway  free  from  submarine 
danger.  Dredging  and  other  maintenance  work  was  at 
once  undertaken,  and  traffic  began  moving  in  volume  in 
the  fall.  In  the  same  month  the  Mississippi  and  War- 

1  The  New  York  Barge  Canal  is  a  public  highway  owned  by  the  State 
of  New  York.  It  never  came  into  the  possession  of  the  Director- 
General,  but  the  Railroad  Administration  operated  boats  upon  it  in 
the  same  way  as  did  other  operators. 


154  RAILROADS  AND   GOVERNMENT 

rior  Waterways  Section  was  created.  The  fleet  of  the 
Kansas  City-Missouri  River  Navigation  Company  was 
purchased,  and  barges  were  leased  from  the  Corps  of 
United  States  Engineers.  Construction  of  towboats  and 
barges  was  authorized.  So  far  as  the  Mississippi  was 
concerned,  there  was  little  development  of  water  traffic 
beyond  that  which  originated  along  its  banks.  Grain 
southbound  and  sugar  northbound  were  the  only  com- 
modities of  any  importance.  The  amount  of  freight 
actually  handled  was  negligible.  The  causes  assigned 
for  the  large  deficit  in  the  operating  statement  were  de- 
fective power  for  the  handling  of  barges  and  inadequate 
terminal  capacity  and  facilities.  For  the  coal  business 
between  the  Warrior  River,  Alabama,  and  New  Orleans, 
equipment  was  purchased  and  contracts  let  for  new  con- 
struction. The  Delaware  and  Raritan  Canal  across  New 
Jersey  was  operated  by  the  Administration  as  an  inci- 
dent to  its  control  of  the  Pennsylvania  Railroad,  which 
is  the  lessee  of  the  canal.  The  Chesapeake  and  Ohio 
Canal  was  guaranteed  against  loss. 

To  encourage  water  traffic,  joint  through  freight  rates, 
both  class  and  commodity,  were  published,  applicable 
to  water  lines  on  the  Mississippi  and  Warrior  Rivers 
and  to  the  New  Jersey  canal  section,  which  enjoyed  a 
differential  of  20  per  cent  against  all-rail  handling.  But 
more  was  needed  than  favorable  rates  to  develop  this 
form  of  co-operation.  Transfer  facilities  were  lacking 
altogether  or  were  hopelessly  obsolete.  The  Govern- 
ment's experience  with  attempts  to  revive  traffic  on 
the  New  York  Barge  Canal  reveals  the  fundamental  ob- 
stacles to  an  immediately  satisfactory  solution.  There 
were  no  unloading  facilities  on  the  banks  of  the  canal, 
and  manufacturing  industries,  because  of  the  prohibitive 
terminal  expense,  refused  to  receive  their  coal  by  water. 
There  were  no  adequate  terminals  at  the  lower  end  of  the 
water  route,  and  canal-boats  were  obliged  to  await  with 
their  loads  the  pleasure  of  the  ocean  steamships,  thus 


FEDERAL  OPERATION  155 

seriously  delaying  traffic  movement.  The  differential  be- 
tween water  and  rail  rates  was  not  satisfactory  to  ship- 
pers, and  the  management,  because  of  costs  of  operation, 
could  not  afford  to  drop  the  water  rate  lower.  During 
1919  Government  craft  carried  a  total  eastbound  and 
westbound  tonnage  of  only  166,000  tons,  for  which  it 
received  a  gross  revenue  of  $510,000.  The  larger  pro- 
portion of  this  tonnage  was  grain  eastbound.  The 
operations  for  the  year  developed  a  deficit  of  $161,000. 
Costs  of  water  transportation  were  affected  by  the  same 
war  influences  that  prevailed  elsewhere  and  efforts  to 
increase  efficiency  by  the  addition  of  improved  equipment 
met  with  the  same  difficulty  that  the  railroads  were 
facing,  a  more  imperative  need  elsewhere  for  the  ma- 
terials of  construction.  Nothing  of  any  significance 
was  accomplished  during  federal  control  in  the  effort  to 
make  the  water  facilities  the  handmaiden  of  the  rail- 
roads. Nothing  more  than  a  beginning  was  made  in 
any  direction.  No  water  traffic  of  any  importance  was 
created.  One  and  all  the  experiments  closed  their  ac- 
counts with  a  deficit. 

This  cursory  survey  of  the  operating  policies  of  the 
federal  administration  brings  out  the  fact  that  there 
were  in  the  mind  of  the  management  two  distinct  objects, 
at  times  conflicting  in  their  effects.  The  first  was  to 
operate  the  roads  as  a  unit  for  the  purpose  of  making  the 
largest  possible  contribution  to  the  winning  of  the  war. 
This  was  the  dominant  motive  during  the  year  1918  up 
to  the  signing  of  the  armistice.  The  second  purpose 
was  to  increase  efficiency  and  reduce  the  cost  of  railroad 
operation  by  the  introduction  of  co-operative  methods, 
wherever  possible,  by  setting  aside  the  individual  selfish 
interests  of  the  particular  road  in  favor  of  the  larger 
interests  of  the  country  as  a  whole.  Through  argu- 
ment and  entreaty  and  by  even  more  stringent  means, 
more  efficient  methods  were  sought  in  the  operation  of 


156  RAILROADS   AND   GOVERNMENT 

trains,  the  delivering  and  loading  and  unloading  of  cars, 
and  the  elimination  of  wasteful  practices  born  out  of  the 
competitive  struggle.  The  campaign  for  more  efficient 
operation  went  along  with  the  war  programme.  In  many 
cases  development  of  efficiency  was  an  aid  to  speedier 
and  more  effective  handling  of  war-supplies  and  troops. 
But  in  many  instances  the  war  necessity  compelled  the 
sacrifice  of  the  principles  of  sound  operation  to  the 
higher  demands  of  the  immediate  exigency. 

As  has  already  been  indicated,  it  is  well-nigh  impossi- 
ble to  measure  with  any  accuracy  the  savings  of  unified 
operation.  Clear-cut  economies  there  undoubtedly  were, 
through  the  elimination  of  competitive  practices  such 
as  advertising  and  outside  agencies,  through  reduction 
in  passenger  service,  abolition  of  fire  insurance,  elimina- 
tion of  many  forms  of  joint  accounting,  and  to  some  de- 
gree through  unification  of  terminal  operation  and  the 
consolidated  ticket  office.  But  general  comparisons  of 
conditions  that  refuse  to  remain  static  must  be  accepted 
with  caution.  Conditions  of  operation  change  rapidly. 
The  elimination  of  one  obstacle  to  economical  movement 
often  creates  another  and  a  wholly  unexpected  one.  A 
comparison  of  the  situation  as  it  actually  worked  out 
with  what  is  assumed  would  have  been  the  situation  if 
unified  operation  had  not  prevailed  can  have  little  value. 
In  this  period  of  rising  prices  and  wages  and  declining 
labor  efficiency,  the  really  important  thing  was  not  to 
save  money  but  to  get  the  job  done,  and  that  as  quickly 
as  possible.  Emphasis  upon  economies  was  largely  for 
political  purposes,1  and  to  meet  the  criticisms  of  those 
who  had  opposed  from  the  beginning  the  assumption  of 
the  roads  by  the  Government. 

1  In  a  letter  to  the  regional  directors,  October  24,  1918,  Director- 
General  McAdoo  urged  that  trips  be  taken  by  officials  for  the  purpose 
of  coming  into  contact  with  local  industries  and  associations  and 
explaining  the  general  policy  of  the  Railroad  Administration,  and 
said:  "Also  explain  the  advantages  that  have  accrued  and  will  accrue 


FEDERAL   OPERATION  157 

However,  it  was  natural  to  assume  that  once  the  war 
was  over,  the  federal  administration  would  be  hi  a  posi- 
tion to  devote  its  entire  attention  to  the  development 
of  an  efficient  national  transportation  agency  in  which 
all  competitive  wastes  would  be  avoided.  But  the  public 
demand  for  the  abolition  of  restrictive  regulations  and 
for  the  restoration  of  pre-war  privileges  was  too  great 
to  be  resisted,  and  the  co-operative  enterprises  and  the 
various  arrangements  for  reducing  operating  costs  dis- 
appeared one  by  one.  Railroad  executives  who  had  given 
of  their  services  unreservedly  during  the  war  to  the  fed- 
eral administration  withdrew  to  renew  their  relations 
with  their  former  corporations,  or  to  assume  new  posi- 
tions in  the  railroad  service,  and  their  duties  with  the 
Government  were  taken  over  by  men  of  less  outstanding 
ability  who  were  obviously  carrying  on  until  the  end 
should  come. 

Following  the  armistice,  passenger  service  was  promptly 
increased.  Coal-zoning,  the  sailing-day  plan,  short- 
routing,  solid-train  despatching  quickly  vanished  as 
federal  policies,  and  joint  terminal  arrangements  began 
to  go  to  pieces.  The  year  1919  was  a  period  of  most  un- 
happy uncertainty  in  which,  as  we  shall  see,  the  federal 
administration  was  urging  a  new  lease  of  life,  and  in 
which  without  this  assurance  it  felt  itself  unable  and  un- 
willing to  undertake  any  long-time  constructive  policy. 
It  was  a  period  of  slow  disintegration  so  far  as  the  gen- 
eral programme  of  co-operation  in  force  in  1918  was  con- 
cerned. However,  the  lessons  learned  through  the  process 
of  trial  and  error  in  matters  of  national  co-operation 
should  not  be  lost.  A  discussion  of  this  problem  will 
form  a  part  of  the  concluding  chapter. 

in  the  future  by  the  improvements  in  transportation  conditions  worked 
out  by  the  Railroad  Administration  and  which  are  bound  to  be  con- 
tinued permanently  because  of  their  efficiency,  economy,  and  expedition 
in  the  handling  of  traffic." 


CHAPTER  XI 

RATE   REGULATION 

SUFFICIENT  has  been  said  to  indicate  that  the  Govern- 
ment, if  it  was  to  make  from  the  operation  of  the  rail- 
roads a  financial  showing  at  all  satisfactory,  would  be 
compelled  to  take  vigorous  steps  to  increase  its  revenues. 
The  Federal  Control  Act  of  March  1918  granted  to  the 
Railroad  Administration  a  rate-making  power  that  was 
almost  unrestricted.  The  President,  whenever  in  his 
opinion  the  public  interest  required,  could  initiate  rates, 
fares,  classifications,  and  regulations  by  filing  them  with 
the  Interstate  Commerce  Commission,  and  these  rates 
and  regulations  were  not  to  be  suspended  by  the  Com- 
mission pending  final  determination.  They  were  to  take 
effect  upon  such  notice  as  the  President  should  direct. 

Finding  itself  facing  the  possibility  of  a  huge  deficit, 
primarily  as  a  consequence  of  wage  increases  and  the 
increase  in  cost  of  materials  and  supplies,  the  Adminis- 
tration announced  on  May  25,  1918,  a  25  per  cent  ad- 
vance in  freight  rates,  effective  June  25,  and  an  advance 
in  passenger  fares  to  a  minimum  of  three  cents  per  mile, 
effective  June  10,  with  a  half-cent  additional  per  mile 
for  the  privilege  of  purchasing  Pullman  service.1  Addi- 
tional regulations  concerning  Pullman  travel  still  further 
increased  the  cost  for  those  seeking  the  more  luxurious 
accommodations.  The  new  rates  were  made  specifically 
to  apply  to  both  state  and  interstate  traffic.  In  many 
cases,  due  to  changes  in  minima  and  in  the  methods  of 
application,  the  increases  in  freight  rates  were  much  in 
excess  of  25  per  cent. 

1  This  extra  charge  was  cancelled  after  the  armistice. 
158 


RATE  REGULATION  159 

The  method  by  which  the  increases  were  accomplished 
must  have  won  the  envy  of  all  railroad  officials  who  had 
struggled  through  protracted  hearings  with  federal  and 
state  commissioners,  and  had  been  obliged  in  the  end 
to  accept  increases,  if  any  at  all,  far  below  what  they 
deemed  necessary  to  meet  their  needs.  The  Director- 
General  explained  that  action  was  necessarily  delayed 
until  the  Federal  Control  Act  could  be  passed;  that  the 
correction  and  adjustment  of  individual  items  in  a  struc- 
ture so  vast  would  have  been  impossible  in  any  brief  space 
of  time,  and  that,  after  conference  with  the  Commission, 
and  after  investigation  of  existing  conditions  and  a  care- 
ful estimate  of  probable  results,  it  was  decided  to  take 
quick  action  that  would  spread  the  increase  as  equitably 
as  possible  over  the  entire  country.  While  the  Adminis- 
tration doubtless  gave  the  matter  mature  consideration, 
the  public  was  not  taken  into  its  confidence,  and  had  to 
content  itself  with  newspaper  rumors.  There  is  little 
question  that  the  summary  manner  in  which  the  increases 
were  put  through  was  deliberate,  and  designed  to  fore- 
stall any  interference  that  might  spring  from  public  dis- 
cussion. In  fact,  such  a  procedure  was  anticipated  in 
the  Federal  Control  Act  itself,  which  reduced  the  power 
of  the  Commission  from  that  of  suspension  of  rates  to 
that  of  making  findings,  after  hearing  complaints  con- 
cerning rates  actually  in  effect. 

These  increases  were  intended  so  to  enhance  net  operat- 
ing revenue  that  the  "standard  return"  payable  to  the 
carriers  under  their  contracts  could  be  secured  without 
drawing  upon  other  Government  funds.  But  obviously 
such  a  plan  could  be  based  on  estimates  only,  as  it 
was  impossible  to  foretell  what  the  effect  upon  traffic 
would  be  from  the  increases  in  rates.  So  far  as  passenger 
traffic  was  concerned,  the  deliberate  intention  of  the  high 
charges  was  to  reduce  travel  and  to  free  roads  and  equip- 
ment for  more  important  functions,  a  purpose  that  largely 


l6o  RAILROADS   AND   GOVERNMENT 

failed  of  effect.  As  for  freight  traffic,  there  was  some 
prospect  that  the  higher  rates  would  be  more  or  less  di- 
rectly reflected  in  higher  net  earnings,  for  transportation 
demand,  in  view  of  war  emergency  conditions,  was  largely 
inelastic,  essential  commodities  having  to  move  regard- 
less of  cost.  But  the  results  of  the  year  1918  in  no  way 
fulfilled  these  optimistic  predictions.  For  the  twelve 
months  the  net  railroad  revenue  fell  short  of  the  amount 
required  to  meet  the  " standard  return"  by  over  $200,- 
000,000.  The  only  district  that  earned  its  standard  re- 
turn was  the  Southern  district,  comprising  the  states 
east  of  the  Mississippi  and  south  of  the  Ohio  and  Poto- 
mac. The  result  in  the  South  was  due  in  large  mea- 
sure to  the  fact  that  investment  in  betterments  did  not 
begin  to  show  results  until  federal  operation  was  under 
way;  in  other  words,  that  the  years  upon  which  the  con- 
tract was  based  were  years  of  light  earnings.  The  bar- 
gain of  the  Southern  roads  with  the  Government  was 
consequently  an  unfortunate  one  for  them. 

The  reasons  assigned  by  the  Director- General  for  the 
outcome  in  1918,  in  which  the  operating  ratio  had  risen 
to  81.3  per  cent,  are  all  connected  directly  or  indirectly 
with  war  conditions,  the  necessity  of  moving  war  freight 
expeditiously  regardless  of  expense,  the  loss  of  men  to 
the  draft  and  to  railroad  service  abroad  and  the  substitu- 
tion of  inexperienced  labor,  and  the  rapid  increase  in 
cost  of  labor  and  materials.  Moreover,  while  wage  in- 
creases were  largely  effective  from  January  i,  the  rail- 
roads received  the  benefit  of  rate  increases  for  only  the 
last  six  months  of  the  year.  As  late  as  January,  1919, 
Director- General  McAdoo  expressed  the  conviction  that 
with  the  return  to  more  nearly  normal  conditions  the  def- 
icit would  not  only  be  wiped  out  but  reductions  in  rates 
might  gradually  be  made,  and  that  earnings  would  show 
an  improvement  for  each  month  over  the  previous  year. 
But  in  spite  of  these  optimistic  predictions,  the  financial 


RATE   REGULATION  l6l 

condition  of  the  railroads  grew  worse  instead  of  better. 
The  operating  ratio  fluctuated  from  month  to  month 
during  1919  from  a  high  point  of  over  92  per  cent  in  Feb- 
ruary to  a  low  of  76  per  cent  in  August  and  back  again 
above  90  per  cent  in  December,  and  reached  a  record 
height  for  the  entire  period  of  federal  control  (nearly 
98  per  cent)  in  February  1920,  the  last  month  of  Govern- 
ment operation.  Roads  whose  net  operating  income  fell 
short  of  the  standard  return  by  over  $200,000,000  in  1918 
failed  to  reach  the  standard  return  in  1919  by  nearly 
$400,000,000,  and  the  aggregate  deficiency  for  the  twenty- 
six  months  of  federal  operation  was  over  $900,000,000. 

Out  of  203  roads  reported  by  the  Bureau  of  Railway 
Economics,  the  number  that  earned  more  than  their  stan- 
dard return  was  76  in  1918  and  only  44  in  1919.  Retro- 
spection is  of  course  far  safer  and  more  illuminating  than 
prophecy,  particularly  in  a  period  when  conditions  were 
constantly  shifting  and  the  country  was  face  to  face  al- 
most daily  with  problems  for  the  solution  of  which  there 
was  little  if  any  precedent.  But  even  granting  all  this, 
the  amazing  optimism  of  Director- General  McAdoo,  which 
pervaded  his  testimony  before  congressional  committees 
and  his  various  public  utterances,  had  little  justification. 
Director- General  Hines  explained  in  his  final  report  the 
reasons  for  the  unfavorable  financial  showing  of  the  pre- 
vious fourteen  months.  He  said  that  could  the  rate  in- 
creases which  became  effective  in  June,  1918,  have  been 
put  in  force  on  January  i,  there  would  have  been  no  fall 
in  net  operating  income  below  the  standard  return  during 
1918,  nor  up  to  October  i,  1919.  The  bad  financial  show- 
ing of  1919  was  due  to  the  sudden  slump  in  business  fol- 
lowing the  armistice  and  resulting  in  part  from  the  steel 
and  coal  strikes  in  the  fall  of  the  year. 

There  has  been  much  discussion  of  the  question  whether 
a  wiser  policy  of  rate  making  would  not  have  required 
gradual  increases  in  rates  to  meet  in  part  at  least  the 


162 


RAILROADS  AND   GOVERNMENT 


growing  expenses  resulting  from  increased  costs  of  ma- 
terials and  of  labor.1  It  is  frequently  asserted  that  it 
was  a  matter  of  indifference  whether  the  people  paid  the 
guarantee  in  the  form  of  taxes  or  of  freight  rates;  it  was 
a  war  cost  to  be  borne  in  any  case.  But  the  answer  is 

1  This  question  of  the  relation  of  railroad  rates  to  prices  during  the 
war,  or  the  burden  of  the  railroad  rate,  has  so  many  points  of  contact 
with  our  discussion  that  it  will  be  of  value  to  present  here  the  facts. 
The  following  tabulation  has  been  prepared  by  the  Bureau  of  Railway 
Economics  from  data  taken  from  the  Statistics  of  Railways  of  the  In- 
terstate Commerce  Commission,  and  from  the  wholesale  prices  of  327 
commodities  determined  by  the  Bureau  of  Labor  Statistics  of  the 
U.  S.  Department  of  Labor.  These  commodities  are  averaged  together 
in  proportion  to  their  relative  importance.  The  year  1913  is  taken 
as  the  base. 

RELATIVE  INCREASE  IN  FREIGHT  RATES  COMPARED  WITH  INCREASED 
COMMODITY  PRICES,  1919-1921.    (1913=100) 


YEAK  OR 

AVERAGE  RECEIPTS 
PER  TON-MILE 
CENTS 

INDEX 
NUMBERS 
OF  WHOLE- 

INDEX 
NUMBERS 
OF  RETAIL 

INDEX  NUMBERS  OF 
RETAIL  COAL  PRICES 

MONTH 

SALE 

PRICES,  43 

ACTUAL 

RELATIVE 

PRICES,  ALL 
COMMODI- 
TIES 

ARTICLES 
OF  FOOD 

PA.  ANTHRA. 

(CHESTNUT) 

PA.  BITUM. 

1913. 

.719 

100 

IOO 

IOO 

IOO 

IOO 

1914. 

.723 

IOI 

IOO 

IO2 

IOO 

105 

I9I5- 

.722 

IOO 

IOI 

IOI 

IOI 

103 

I9l6. 

.707 

98 

I24 

114 

109 

112 

1917. 

•715 

IOO 

176 

146 

121 

134 

I9l8. 

.849 

1x8 

196 

1  68 

134 

144 

1919. 

•  973 

135 

212 

186 

154 

152 

1920. 

.052 

146 

243 

203 

183 

198 

Sept.  1920. 

.151 

1  60 

242 

203 

200 

223 

Oct.  1920. 

.226 

171 

225 

198 

2O4 

230 

Nov.  1920. 

.263 

176 

207 

193 

206 

230 

Dec.  1920. 

.209 

1  68 

189 

178 

2O6 

226 

Jan.  1921. 
Feb.  1921. 

.210 
•  254 

168 
174 

177 
I67 

172 
158 

2O4 
2O  I 

218 

210 

Mar.  1921. 

•  335 

186 

l62 

156 

198 

2O5 

Apr.  1921. 

•  334 

186 

IS4 

152 

188 

195 

May  1921. 

•251 

174 

151 

145 

188 

191 

June  1921. 

.278 

178 

148 

144 

188 

191 

It  will  be  noted  that  even  as  late  as  January  1921,  when  deflation 
had  set  in  and  many  were  crying  out  against  the  burden  of  the  high 
freight  rate  and  demanding  its  reduction,  wholesale  prices  were  still 
9  points  and  retail  prices  4  points  above  freight  rates.  During  the 
entire  period  under  consideration  rates  lagged  behind  prices  in  their 
upward  advance. 


RATE  REGULATION  163 

not  so  simple.  Aside  from  the  obviously  more  business- 
like method  of  making  an  industry  pay  its  way,  and  mak- 
ing the  public  realize  definitely  that  they  are  getting  only 
what  they  are  paying  for,  there  is  the  other  and  far  more 
intricate  question  of  the  incidence  of  the  burden  in  the 
two  cases.  It  cannot  be  correctly  assumed  that  the  two 
situations  would  be  identical.  Yet  if  we  look  upon  fed- 
eral control  as  wholly  a  war  policy,  then  there  was  justi- 
fication perhaps  in  distributing  the  war  cost  as  widely  as 
possible,  and  the  tax  method  rather  than  the  freight-rate 
method  would  be  efficacious  for  the  purpose. 

However,  Director- General  Hines  defended  the  policy 
of  the  Administration  on  the  grounds  of  expediency.  The 
complexity  of  the  rate  structure,  the  enormous  number 
of  adjustments  in  rate  relationships  that  had  been  neces- 
sitated by  the  horizontal  increase  in  June,  1918,  were 
deterrents  to  another  advance.  Freight-rate  readjust- 
ment is  so  disturbing  to  business  that  no  change  ought 
to  take  place  except  when  the  reasons  are  imperative, 
and  there  was  great  uncertainty  at  this  time  as  to  the 
need  for  the  increase.  The  belief  that  rate  increases 
would  be  used  as  occasions  for  unnecessary  increases  in 
price,  and  thus  aggravate  an  already  desperate  situation 
was  another  deterrent.  An  increase  at  this  time  would 
also  have  made  more  difficult  the  handling  of  the  wage 
problem.  Toward  the  end  of  federal  control  there  was 
an  obvious  unwillingness  to  act.  The  policy  then  was  to 
pass  the  problem  on  to  private  management.  In  the  face 
of  the  general  feeling  prevailing  throughout  the  year,  no 
rate  increase  could  have  been  put  promptly  into  force  by 
the  Director- General.  In  deference  to  the  public  attitude 
it  would  have  been  necessary  to  ask  the  Commission  to 
pass  upon  the  increase,  and  this  would  have  meant  delay. 
Moreover,  it  was  ingeniously  argued  that  any  rate  increase 
required  to  cover  the  expenses  of  federal  control  would 
not  have  been  sufficient  in  any  case  to  meet  the  larger 


164  RAILROADS  AND   GOVERNMENT 

expense  of  private  operation,  and  as  the  roads  when  again 
in  private  hands  would  have  to  secure  further  increases, 
the  public  interest  would  be  better  served  by  having  the 
entire  advance  come  at  one  time. 

Any  attempt  to  reach  a  final  conclusion  on  this  ques- 
tion involves  much  speculation  as  to  what  would  have 
been  the  effect  upon  business  of  another  moderate  in- 
crease in  rates  by  the  Administration,  as  compared  with 
the  somewhat  radical  increase  necessitated  in  August, 
1920,  when  the  roads  were  again  in  private  hands.  We 
cannot  now  determine  whether  business  would  have  ad- 
justed itself  more  easily  to  the  gradual  method,  neither 
do  we  have  the  means  of  knowing  to  what  extent  the  in- 
creases would  have  been  multiplied  in  prices.  From  the 
standpoint  of  the  individual  railroad,  it  is  obvious  that 
a  more  courageous  policy  on  the  part  of  the  Administra- 
tion during  the  period  of  federal  control  would  have  been 
preferable,  because  it  would  have  facilitated  the  process 
of  transfer  of  the  roads  back  into  private  hands.  But 
Director- General  Hines,  in  his  exhaustive  review  of  his 
policy,  reached  the  conclusion  that  in  any  case  rates  could 
not  have  been  advanced  fast  enough  to  meet  the  rapidly 
changing  conditions,  and  that,  everything  considered,  the 
policy  adopted  by  the  Administration  was  "vastly  more 
in  the  public  interest  than  any  other  policy  that  could 
have  been  adopted  with  reference  to  the  rate  matter." 

Under  the  rate-making  power,  the  federal  administra- 
tion had  the  unique  opportunity  of  putting  on  trial  a 
uniform  classification,  a  goal  which  regulating  authorities 
have  been  endeavoring  to  reach  for  thirty  years.  For 
many  years  the  railroads  have  had  a  uniform  classification 
committee  at  work  endeavoring  to  reconcile  the  con- 
flicting interests  of  different  industries  and  sections  and 
the  railroads  serving  them,  and  from  time  to  time  the 
work  of  these  committees  has  come  officially  under  the 
eye  of  the  Commission.  In  1912  Western  Classification 


RATE  REGULATION  165 

No.  51  was  suspended1  by  the  Commission  and  thor- 
oughly examined.  Certain  fundamental  principles  were 
laid  down  for  the  guidance  of  railroad  committees  in  their 
future  work.  In  1919,  in  the  Lumber  Classification  Case,2 
the  Commission  announced  fundamental  guiding  prin- 
ciples of  a  sound  classification.  But  in  all  cases  where 
the  matter  has  arisen  it  has  confined  itself,  so  far  as  the 
broader  issue  was  concerned,  to  general  suggestions  and 
limitations.  In  spite  of  the  unquestioned  power  possessed 
by  it  since  1910  to  prescribe  a  uniform  classification,  the 
Commission  has  preferred,  because  of  the  complexities, 
the  enormous  detail,  and  the  necessary  compromises  in- 
volved, to  confine  its  activity  to  stimulating  the  carriers 
and  to  leave  the  execution  of  the  project  to  them. 

The  Railroad  Administration  in  1918  appointed  a  com- 
mittee to  take  up  and  complete  the  work  which  had 
been  begun  by  the  carriers'  committee  ten  years  before. 
The  completed  consolidated  classification  was  not  put 
into  force  by  the  Director- General  as  he  had  power  to 
do,  but  was  submitted  to  the  Interstate  Commerce  Com- 
mission for  its  approval.  After  extended  hearings,  the 
Commission  recommended  the  adoption  of  the  classifica- 
tion so  far  as  it  concerned  general  rules,  commodity  de- 
scriptions, packing  specifications,  and  estimated  and 
car-load  minimum  weights,  but  generally  disapproved 
the  commodity  ratings  because  they  effected  such  a  large 
number  of  increases  in  rates,  particularly  in  Eastern  and 
Southern  territory.  So  far  as  separate  state  classifications 
were  investigated,  the  Commission  concluded  that  the 
local  situations  must  needs  be  worked  out  fully  after 
careful  investigation,  and  that  no  benefit  was  to  be  gained 
by  substituting  at  that  time  the  consolidated  schedule 
for  the  various  state  classifications.3  In  accord  with  the 

1  25  I.  C.  C.,  442.     The  opinion  includes  a  complete  history  of  the 
movement  for  uniform  classification. 

2  52.1.  C.  C.,  598.  *  54  I-  C-  C.,  i  (Sept.,  1919). 


1 66  RAILROADS  AND  GOVERNMENT 

Commission's  suggestions,  the  Railroad  Administration 
filed  Consolidated  Freight  Classification  No.  i  with  the 
Interstate  and  state  commissions,  effective  December 
30,  1919.  The  Consolidated  Classification  Committee 
created  during  the  Railroad  Administration  has  now 
been  made  a  permanent  organization  by  the  carriers  and 
is  proceeding  in  the  direction  of  uniform  ratings. 


CHAPTER  XII 

RELATION  OF    THE   RAILROAD    ADMINISTRATION    TO    OTHER 
REGULATING  AGENCIES 

IN  his  proclamation  taking  possession  of  the  roads, 
the  President  directed  that  the  systems  of  transportation 
taken  over  should  remain  subject  for  the  time  being  to 
all  statutes  and  orders  of  the  Interstate  Commerce  Com- 
mission and  the  state  commissions,  but  that  any  orders 
thereafter  made  by  the  Director- General  should  have 
paramount  authority.  Such  sweeping  authority  as  was 
assumed  by  the  President  under  his  war  powers,  and  as 
was  further  specifically  delegated  to  him  by  the  Federal 
Control  Act  in  March,  1918,  could  not  but  run  foul  of 
existing  regulating  bodies.  The  very  first  order  of  the 
Director- General,  dated  December  29,  1917,  authorized 
the  carriers  to  disregard  established  routes  whenever 
necessary  in  the  interest  of  economy  and  efficiency,  and 
thereby  superseded  Section  15  of  the  Interstate  Com- 
merce Act,  which  protected  carriers  against  being  short- 
hauled  and  which  granted  to  shippers  the  right  to  route 
their  freight.  By  throwing  all  railroads  into  one  operat- 
ing system  and  authorizing  the  utilization  of  all  terminals, 
equipment,  and  facilities,  regardless  of  ownership,  this 
same  general  order  removed  the  protection  granted  by 
Section  3,  which  gave  to  carriers  exclusive  right  to  use 
their  own  tracks  and  terminals. 

But  in  the  matter  of  rates,  as  already  noted,  the  limita- 
tions upon  the  Commission's  authority  were  particularly 
severe.  Section  10  of  the  Federal  Control  Act  gave  the 
President  power  to  initiate  rates  and  put  them  into  effect 
as  an  incident  to  the  exercise  of  his  war  functions.  When 
once  the  rates  were  in  effect,  complaints  might  be  filed 

167 


1 68  RAILROADS  AND   GOVERNMENT 

with  the  Commission,  which  was  then  to  hold  its  hearings 
and  to  render  decisions  as  to  the  reasonableness  and  jus- 
tice of  the  rates.1  Thus  far  the  procedure  was  a  return 
to  that  which  prevailed  between  1906  and  1910  and  be- 
fore the  power  to  suspend  rates  was  conferred  upon  the 
Commission.  But  the  analogy  was  not  a  close  one.  For 
the  Commission  was  instructed  by  law  to  give  due  con- 
sideration to  the  fact  that  the  transportation  systems 
were  not  in  competition,  but  were  being  operated  as  a 
unit.  Moreover,  whenever  the  President  found  and  certi- 
fied that  in  order  to  defray  the  expenses  of  federal  opera- 
tion and  cover  the  compensation  to  the  carriers  it  was 
necessary  to  increase  revenues,  the  Commission  was  re- 
quired in  passing  upon  such  increased  rates  to  take  into 
account  the  finding  and  certificate  of  the  President,  to- 
gether with  such  recommendations  as  he  might  make. 
This  rate-making  power  of  the  President  set  aside  Sec- 
tion 6  of  the  Interstate  Commerce  Act,  which  required 
thirty  days'  notice  of  a  change  in  rates,  for  the  amount 
of  advance  notice  of  any  change  was  now  at  the  discre- 
tion of  the  President. 

This  new  procedure  inevitably  grew  in  importance.  The 
sudden  horizontal  increase  in  rates  in  June,  1918,  created 
a  multitude  of  maladjustments  and  threw  out  of  gear  a 
closely  interlocked  rate  structure.  It  was  necessary  to 
establish  agencies  that  could  handle  these  local  problems 
in  behalf  of  the  central  administration.  Accordingly, 
freight  traffic  committees  were  organized,  consisting  of 

1  From  Circular  No.  i-A,  issued  by  Division  of  Traffic,  U.  S.  Rail- 
road Administration,  July  I,  1918,  to  traffic  committees,  railroad  and 
water  lines  under  federal  control:  "As  no  authority  other  than  as 
required  by  this  circular  is  necessary  to  change  rates,  fares,  charges, 
classifications,  regulations,  or  practices  applying  wholly  on  carriers 
under  federal  control,  no  application  should  be  made  to  the  Interstate 
Commerce  Commission  or  to  any  state  commission  for  authority  to 
advance  or  modify  rates,  .  .  .  nor  for  authority  to  publish  changes 
therein  on  short  notice,  and  any  such  applications  made  heretofore 
should  be  withdrawn." 


THE   RAILROAD   ADMINISTRATION  169 

three  general  committees  at  New  York,  Chicago,  and 
Atlanta,  and  a  large  number  of  district  committees. 
These  committees,  numbering  either  three  or  five  mem- 
bers each,  contained  representatives  of  railroad  and  ship- 
ping interests.  At  the  beginning,  the  former  were  always 
in  the  majority,  but  later  representation  was  equalized. 
It  was  the  duty  of  these  committees  to  conduct  hear- 
ings and  make  recommendations  for  adjustments.  Final 
action  was  taken  by  the  Division  of  Traffic  in  the  Direc- 
tor-General's administration  after  consultation  with  the 
Division  of  Public  Service.  Disagreements  were  adjusted 
by  the  Director- General.  Advice  was  frequently  asked 
of  the  Interstate  Commerce  Commission  and  of  state 
commissions  before  rates  were  finally  put  into  effect. 

This  system  of  rate  adjustment  emphasized  the  sub- 
ordinate position  that  the  Interstate  Commerce  Com- 
mission was  perforce  compelled  to  take.  Moreover,  once 
the  war  was  over,  the  system  was  attacked  by  shippers' 
organizations  as  autocratic,  and  Congress  was  urged  to 
restore  the  full  powers  of  the  Commission  with  respect 
to  suspension  and  investigation  of  rates.  It  was  argued 
that  no  disinterested  body  with  authority  to  act  was  in 
existence,  and  that  the  Director- General  could  decide  con- 
troverted questions  without  any  semblance  of  a  hearing. 
This  feeling  ripened  into  a  bill  which  passed  both  houses 
of  Congress  in  November,  1918,  giving  to  the  Commis- 
sion power  to  suspend  rates  initiated  by  the  President, 
and  coupling  with  it  a  provision  prohibiting  the  President 
from  increasing  intra-state  rates  without  the  prior  ap- 
proval of  the  state  commissions.  In  his  veto  message 
the  President  expressed  himself  as  agreeable  to  the  res- 
toration of  the  power  of  rate  suspension  by  the  Commis- 
sion, but  he  could  not  accept  a  law  that  deprived  the 
federal  government  of  power  to  make  changes  freely  in 
intra-state  rates,  at  the  time  when  the  Government  was 
solely  responsible  for  the  operation  of  the  railroads.  He 


170  RAILROADS  AND   GOVERNMENT 

insisted  that  the  practice  followed  by  the  Railroad  Ad- 
ministration of  consulting  the  Interstate  Commerce  Com- 
mission on  matters  of  fundamental  policy  insured 
adequate  representation  of  the  public  interest,  and 
avoided  divided  action  and  delay.  The  attitude  of  the 
Administration  toward  the  method  of  rate  adjustment 
that  it  was  pursuing  is  found  in  the  comment  of  Director 
Prouty  of  the  Division  of  Public  Service. 

"In  all  my  experience  with  rate  making  and  rate  regu- 
lation in  this  country,  which  goes  back  almost  a  quarter 
of  a  century,  there  has  been  no  time  when  the  interest 
of  the  shipper  in  the  matter  of  rate  changes  was  as  well 
protected  as  it  is  under  the  system  now  in  effect,  and 
there  never  has  been  a  time  when  on  the  average,  rate 
changes  were  made  as  intelligently  and  as  speedily.  I 
have  long  insisted  that  it  was  of  vital  importance  to  the 
shipper  to  participate  in  those  preliminary  discussions 
which  resulted  in  the  recommendation  of  a  change;  and 
I  am  confident  that,  whoever  operates  the  railroads  of 
this  country,  this  idea  which  is  now  for  the  first  time 
recognized  will  be  in  some  form  perpetuated."  l 

Director  Prouty's  suggestion  of  carrying  over  into 
peace  times  the  plan  for  conferences  between  shippers 
and  railroads  at  the  seat  of  trouble  is  worthy  of  serious 
consideration.  Much  time  and  expense  would  be  saved 
in  expediting  cases  before  the  commissions  and  many 
cases  would  never  have  to  go  there  at  all.  The  lack  of 
such  official  agencies  of  co-operation  is  a  serious  criticism 
of  our  regulation  policy.  It  is  encouraging  to  observe 
that  the  joint-conference  plan  in  an  informal  manner  is 
still  hi  use.  The  restoration  of  the  powers  of  the  Inter- 
state Commerce  Commission  has  removed  the  main  ob- 

1  Hearings,  Senate  Com.  on  Interstate  Commerce.  February,  1919, 
page  857. 


THE  RAILROAD   ADMINISTRATION  171 

jections  to  these  committees  entertained  by  the  shippers' 
organizations.  The  elaborate  organization  of  the  war 
period  has  not  been  restored,  but  the  spirit  of  co-opera- 
tion which  is  being  exhibited  between  railroad  and  shipper 
organizations  gives  promise  that  some  plan  that  shall 
provide  a  medium  for  the  airing  of  disputes  and  a  method 
of  orderly  procedure  for  their  handling  will  eventually 
become  a  permanent  part  of  our  traffic  machinery. 

In  this  same  connection  it  is  of  interest  to  examine 
the  Division  of  Public  Service  of  the  Railroad  Adminis- 
tration, a  department  that  grew  almost  inevitably  out 
of  the  new  relationship  of  the  railroads  and  the  public. 
Service  and  charges  were  wholly  under  the  control  of 
the  Government  administration,  which  felt  called  upon 
to  examine  constantly  its  own  efficiency,  and  to  justify 
its  policy  to  its  patrons.  This  division  expanded  its  func- 
tions steadily,  and  was  of  especial  importance  during  the 
second  year  of  federal  administration.  It  was  respon- 
sible for  the  traffic  committees  already  described,  upon 
which  the  shippers  were  represented.  It  created  special 
terminal  committees  to  increase  efficiency  at  these  points. 
It  had  advisory  power,  and  later  joint  jurisdiction  with 
the  Division  of  Traffic  over  rates,  and  handled  all  com- 
plaints concerning  rates  filed  by  the  public.  It  super- 
vised the  relationship  between  the  Railroad  Administra- 
tion and  the  state  commissions,  and  through  its  Bureau 
of  Complaints  it  disposed  of  a  multitude  of  grievances 
that  poured  in  by  letter  from  discontented  shippers  and 
travellers.1  Many  matters  of  freight  and  passenger  ser- 
vice never  before  regulated  were  taken  cognizance  of. 
The  enthusiastic  Director  of  the  division  called  it  a  full- 


1  Adjustments  made  by  the  Bureau  of  Suggestions  and  Complaints 
ranged  all  the  way  from  the  installation  of  additional  passenger-trains 
down  to  the  inclusion  in  the  menu  on  the  dining-cars  of  shredded-wheat 
biscuit,  at  the  request  of  a  passenger  who  stated  that  he  missed  this 
cereal  from  the  menu  on  that  train  for  the  first  time  in  six  years. 


172  RAILROADS   AND   GOVERNMENT 

fledged  public-service  commission,  which  was  something 
of  an  exaggeration,  in  view  of  the  fact  that  the  agency 
that  performed  the  service  and  made  the  rates  was  the 
same  that  entertained  the  complaints  and  conducted  the 
investigations.  However,  its  experience  was  doubtless  of 
material  influence  in  extending  the  Commission's  regu- 
lating power  over  service  in  the  legislation  of  1920. 

While  the  war  legislation  did  not  in  so  many  words 
shear  the  Commission  of  its  power  to  determine  the  rea- 
sonableness of  rates  once  a  complaint  had  been  presented, 
yet  when  the  question  was  one  of  adequate  revenue 
rather  than  one  involving  the  rate  on  a  specific  ship- 
ment, it  at  once  became  a  question  of  public  policy  in 
which  the  Commission  was  left  with  little  discretion. 
The  findings  and  the  certificate  of  the  Director- General, 
the  personal  representative  of  the  President  of  the  United 
States,  were  given  by  the  statute  a  weight  that  left  the 
Commission  little  choice  except  to  approve  the  schedule 
as  a  whole. 

Such  issues  as  have  given  the  Commission  the  oppor- 
tunity to  assert  its  independence  of  the  federal  Railroad 
Administration  may  be  illustrated  by  the  case  of  Wil- 
lamette Valley  Lumberman's  Association  v.  South  Pacific 
Co.1  This  was  a  case  of  undue  preference.  Complaint 
was  entered  before  the  Director- General  instituted  his 
increases  in  June,  1918,  and  the  preference  was  enhanced 
by  this  increase.  It  was  the  argument  of  the  Director- 
General  that  the  words  "reasonable  and  just"  in  the 
Control  Act  had  a  meaning  different  from  that  applied 
to  them  in  the  Act  to  Regulate  Commerce,  and  that  the 
rates  initiated  by  the  Director- General  were  in  themselves 
and  in  relation  to  each  other  presumed  to  be  right,  and 
could  not  be  changed  without  an  affirmative  showing 
that  they  were  wrong.  The  first  contention  the  Com- 
mission denied.  To  the  second,  it  replied  that  there  was 
'51  I.  C.  C.f  250  (1918). 


THE  RAILROAD  ADMINISTRATION  173 

no  authority  in  the  Control  Act  for  perpetuating  during 
federal  control  a  rate  adjustment  that  was  unlawful  under 
the  Act  to  Regulate  Commerce;  that  the  increases  ini- 
tiated by  the  Director-General  were  merely  superimposed 
on  the  existing  basis  of  rate  adjustment,  which  all  the 
evidence  showed  was  unreasonable  and  unjust.  "It  is 
inconceivable,"  said  the  Commission,  "that  the  Congress 
did  a  vain  thing  in  conferring  upon  this  Commission 
power  to  determine  whether  or  not  the  rates  initiated 
by  the  Director- General  are  just  and  reasonable."  An 
appropriate  order  was  entered  against  the  defendants, 
including  the  Director-General. 

The  authority  of  the  Commission  was  again  challenged 
in  connection  with  various  applications  for  relief  from 
the  4th  Section  (the  long  and  short  haul  clause),  and  it 
was  urged  that  the  power  to  grant  relief  was  in  suspense 
during  the  period  of  federal  control.  It  was  the  position 
of  the  Commission,1  maintained  throughout  this  period, 
that  the  Act  to  Regulate  Commerce  was  in  full  force,  ex- 
cept so  far  as  it  was  inconsistent  with  the  Federal  Con- 
trol Act,  that  there  was  nothing  in  the  Control  Act  or  in 
the  President's  proclamation  to  indicate  that  Section  4  was 
a  hindrance  to  the  prosecution  of  the  war  and  should  be  set 
aside,  and  that  accordingly  it  would  be  enforced.  Gen- 
erally speaking,  the  Director- General  declined  to  regard 
carriers'  applications  for  relief  from  Section  4,  and  during 
the  federal-control  period  most  of  the  applications  filed 
were  by  roads  not  under  Government  operation.  Yet  in 
numerous  instances  rates  were  established  by  the  Di- 
rector-General that  constituted  violations  of  the  clause 
and  which  remained  in  effect  during  federal  control.  Cor- 
rection of  these  maladjustments  has  proceeded  slowly 
during  1921. 

So  far  as  rates  not  under  federal  control  were  con- 
cerned, they  were  subject  in  all  their  interstate  relations 
1  51  I.  C.  C.,  356  (November,  1918). 


174  RAILROADS  AND   GOVERNMENT 

to  the  Act  to  Regulate  Commerce,  and  the  Commission 
still  had  its  former  jurisdiction  over  joint  traffic  between 
federal  and  non-federal  roads.  But  this  jurisdiction  cov- 
ered a  relatively  insignificant  portion  of  the  traffic  of 
the  country. 

In  the  field  occupied  by  the  state  commissions,  the  fed- 
eral Railroad  Administration  exhibited  even  less  regard 
for  the  sensibilities  of  regulating  authority.  General 
Order  No.  28,  increasing  freight  and  passenger  rates, 
was  made  specifically  applicable  to  intra-state  as  well  as 
interstate  traffic.  In  matters  of  service  the  Railroad 
Administration  proceeded  with  almost  no  recognition  of 
even  the  existence  of  state  commissions.  Relations  be- 
came strained  as  a  consequence  of  the  creation  of  district 
traffic  committees,  already  described.  It  became  the 
practice  of  many  railroad  officials  to  disregard  the  juris- 
diction of  state  commissions  and  to  take  up  rate  matters 
with  these  traffic  committees  instead.  This  was  only 
natural,  because  the  ultimate  determination  of  the  rate 
rested  with  the  Railroad  Administration  in  Washington 
rather  than  with  any  state  authority.  Local  feeling  be- 
came articulate  in  resolutions  adopted  at  the  meeting 
of  the  National  Association  of  Railway  and  Utilities 
Commissioners  in  October,  1918,  in  which  the  members 
demanded  full  authority  on  the  part  of  the  states,  and 
declared  that  in  any  event  it  was  the  duty  of  each  state 
commission  to  exercise  and  maintain  its  authority  to  the 
extent  that  it  might  deem  the  public  interest  demanded. 
It  declared  further  that  "the  Association  is  emphatically 
of  the  opinion  that  any  plan  for  the  future  operation  of 
the  railroads  should  fully  safeguard  the  powers  of  local 
tribunals,  responsible  to  the  people  of  the  several  states, 
with  respect  to  rates,  service  and  facilities  intra-state  in 
character."  The  issue  was  most  sharply  drawn  in  con- 
nection with  express  rates  which  were  filed  by  the  Direc- 
tor-General in  1918.  Suits  were  instituted  against  their 


THE  RAILROAD  ADMINISTRATION  175 

application  intra-state  in  Nebraska,  Iowa,  South  Dakota, 
and  Minnesota.  These  issues  were  all  disposed  of  by  the 
Supreme  Court  decision  in  the  North  Dakota  case  men- 
tioned later. 

During  the  war,  the  Federal  Railroad  Administration 
never  squarely  met  the  issue  and  never  officially  inter- 
preted its  powers.  In  practice,  it  initiated  state  rates 
and  filed  them  with  the  state  commissions  "for  informa- 
tion only."  In  matters  of  service,  it  asserted  its  com- 
plete authority.  Early  in  1919,  the  war  being  ended, 
and  plans  being  under  way  for  a  return  to  a  peace  basis, 
the  Railroad  Administration,  after  conference  with  rep- 
resentatives of  state  commissions,  announced  a  formal 
policy  in  matters  that  might  come  into  conflict  with  state 
jurisdiction.  Transportation  systems  under  federal  con- 
trol were  to  continue  subject  to  the  lawful  police  regula- 
tions of  the  several  states  in  matters  relating  to  spur 
tracks,  railroad  crossings,  safety  appliances  and  train 
service,  and  it  was  to  be  the  policy  of  the  Director-Gen- 
eral to  cause  the  orders  of  the  state  commissions  to  be 
carried  out.  Attention  was  called,  however,  to  the  finan- 
cial condition  of  the  roads,  and  it  was  assumed  that  ex- 
penditures would  be  ordered  by  the  state  commissions 
only  after  full  consideration  of  the  needs  and  difficulties 
of  the  United  States  in  operating  the  railroads.  As  for 
rate  matters,  the  Directors  of  Traffic  and  Public  Service 
were  ordered,  before  authorizing  important  advances  in 
rates,  state  or  interstate,  to  submit  them  for  advice  and 
suggestion  to  the  commissions  in  the  states  affected. 
Carriers  were  ordered,  for  the  purpose  of  maintaining 
the  continuity  of  state  records,  to  file  with  state  commis- 
sions, for  information  only,  all  rate  schedules  and  annual 
and  other  reports  required  by  state  statutes.  As  to  the 
division  of  authority  over  rates,  the  conference  disagreed, 
and  the  Director- General  announced  his  purpose  to  ex- 
pedite a  decision  at  law  by  the  appropriate  tribunal.  The 


176  RAILROADS  AND  GOVERNMENT 

opportunity  arose  in  a  case  in  North  Dakota  in  which 
the  Supreme  Court  of  that  state  directed  the  issue  of  a 
peremptory  writ  of  mandamus,  ordering  the  railroads  to 
desist  from  collecting  on  intra-state  business  any  other 
charges  than  those  on  file  with  the  State  Board  of  Rail- 
road Commissioners.  Upon  appeal  the  Supreme  Court 
of  the  United  States  upheld  the  authority  of  the  Direc- 
tor-General as  a  war  power  and  sustained  the  rate-mak- 
ing functions  embodied  in  the  Federal  Control  Act.1 
Notwithstanding  this  decision,  the  Director- General 
continued  to  seek  the  advice  of  state  commissions  in 
matters  affecting  rates.  Their  assistance  was  as  a  rule 
cheerfully  offered,  and  was  influential  in  shaping  the  final 
conclusions. 

1  250  U.  S.,  135  (June  2,  1919). 


CHAPTER  XIII 

THE   GOVERNMENT  AND   LABOR 

As  has  been  already  pointed  out,  the  critical  char- 
acter of  the  labor  situation  was  one  of  the  factors  that 
led  to  the  nationalization  of  the  railroads  during  the  war. 
Trouble  had  long  been  brewing,  the  gravity  of  which 
railroad  managements  had  been  unable  to  abate.  Long 
before  our  entrance  into  the  war,  railroads  traversing 
manufacturing  sections  were  losing  their  men  to  muni- 
tion plants  and  other  industries,  some  roads  turning  their 
mechanical  forces  over  two  and  three  times  in  the  year. 
Wages  were  steadily  rising  and  the  quality  of  service  was, 
because  of  war-pressure,  steadily  falling.  With  the  in- 
auguration of  the  draft,  the  situation  became  still  more 
acute,  invading  not  only  the  mechanical  forces  but  all 
departments  of  the  railroads.  From  that  time  on  the 
experience  of  railroads  throughout  the  country  was  the 
same,  a  constant  struggle  to  hold  their  organizations 
together,  and  continuous  concessions  in  wages.  Former 
methods  of  negotiation  were  abandoned.  Threatened 
strikes  overnight  necessitated  adjustments  on  a  few 
hours'  notice  to  avoid  breakdown  of  the  organization. 
Very  considerable  increases  in  wages  took  place  in  the 
classes  of  telegraphers,  station  clerks,  platform  labor, 
and  the  like,  and  among  the  mechanical  forces  wages 
soared  to  unprecedented  heights.  One  of  the  classes 
that  received  the  largest  percentage  of  increase  was  that 
of  unskilled  labor. 

The  labor  problem,  so  far  as  it  affects  train  operation, 
concerns  itself  with  the  activities  of  the  four  brother- 
hoods, which  include  in  their  membership  nearly  all  the 
employees  in  the  classes  of  locomotive  enginemen  and 

177 


178  RAILROADS   AND   GOVERNMENT 

firemen,  conductors,  brakemen,  flagmen,  and  other  train- 
men, approximating  400,000  men.  It  will  be  recalled 
that  a  nation-wide  strike  of  all  these  employees  set  for 
Labor  Day,  1916,  was  only  averted  by  the  passage  by 
Congress  of  the  Adamson  Eight  Hour  Law,  and  that 
under  threat  of  a  strike  the  railroads  granted  the  basic 
eight-hour  day  provided  for  by  the  congressional  enact- 
ment without  waiting  for  the  decision  of  the  Supreme 
Court  concerning  its  constitutionality. 

Here  the  matter  rested  until  November,  1917,  when 
the  increasing  cost  of  living  and  the  wage  increases  being 
granted  in  other  industries  produced  an  uneasiness  among 
the  rank  and  file  of  some  of  the  trainmen's  organizations 
which  it  was  apparently  impossible  for  the  leaders  to 
suppress.  When  it  became  clear  that  definite  demands 
for  increases  were  being  formulated  and  that,  in  spite  of 
the  efforts  of  the  official  federal  mediator,  a  clash  was 
impending,  the  President  called  the  leaders  of  the  four 
brotherhoods  into  conference  on  November  22.  The 
public  information  concerning  the  results  of  this  con- 
ference is  contained  in  two  statements,  one  of  which  was 
given  out  by  the  brotherhoods,  and  was  as  follows: 

"The  men  who  comprise  the  railway  brotherhoods  are 
thorough  Americans,  therefore  they  believe  in  American 
standards  of  living,  and  in  consequence  of  this  realize 
that  standards  of  pay  that  were  established  in  1912  and 
1913  are  inadequate  to  meet  present-day  prices  for  com- 
modities, and  for  that  reason  are  demanding  an  increase 
in  present  rates  that  will  meet  half  at  least  of  the  increase 
in  cost  of  those  things  which  they  are  compelled  to  pur- 
chase. 

"They  want  to  co-operate  in  every  way  that  is  at  all 
possible  in  the  successful  prosecution  of  the  war,  and 
they  fully  realize  that  the  most  serious  thing  that  could 
occur  during  the  conduct  of  war  would  be  any  interrup- 


THE  GOVERNMENT  AND  LABOR          179 

tion  of  railway  transportation,  and  they,  in  common  with 
the  great  body  of  the  people,  are  determined  to  do  every- 
thing within  the  bounds  of  reason  to  avoid  such  inter- 
ruption. 

"Being  fully  conversant  with  their  attitude  and  de- 
sire in  this  matter,  we  are  in  a  position  to  give  the  as- 
surance that,  if  the  situation  should  arise  which  would 
threaten  the  interruption  of  transportation  the  men  whom 
we  represent  would  be  more  than  willing  to  discuss  and 
consider  any  solution  of  the  difficulty  which  presented 
itself,  doing  so  in  the  spirit  of  patriotic  co-operation,  and 
would  undoubtedly  co-operate  with  the  government  to 
the  utmost  extent  in  arriving  at  a  just,  equitable,  as  well 
as  patriotic  conclusion." 

The  other  statement  was  the  President's,  to  the  effect 
that  "he  had  got  from  the  interview  exactly  the  impres- 
sion conveyed  by  the  statement  of  the  heads  of  the 
brotherhoods,  namely,  that  the  men  whom  they  repre- 
sented were  not  inclined  to  contend  for  anything  which 
they  did  not  deem  necessary  to  their  own  maintenance 
and  the  maintenance  of  their  families,  and  that  they 
would  be  willing  in  case  any  critical  situation  of  contro- 
versy should  arise  to  consider  any  proposed  solution  in 
a  spirit  of  accommodation  and  of  patriotic  purpose." 

On  November  19  the  Railroads'  War  Board  sent  a 
letter  to  the  President  in  which  it  declared,  in  answer  to 
his  inquiry  as  to  the  railroad  attitude  concerning  the 
manner  of  settlement  of  wage  disputes  during  the  war, 
that  they  adhered  to  the  principle  of  arbitration  as  a 
general  rule  of  action,  but,  to  prevent  interruption  of 
operation  in  the  midst  of  war,  they  would  place  their 
interests  in  the  hands  of  the  President  for  such  disposi- 
tion as  the  public  welfare  might  require. 

Two  of  the  brotherhoods  presented  on  December  i 
to  practically  every  railroad  in  the  country  demands  for 


l8o  RAILROADS  AND   GOVERNMENT 

increases  approximating  40  per  cent,  and  the  others  had 
the  matter  under  consideration  when  the  Government 
took  over  the  roads.  Co-operation  under  the  Railroads' 
War  Board  had  accomplished  much  from  the  operating 
standpoint,  but  it  was  of  little  use  in  the  handling  of  the 
labor  question.  It  represented  management  compactly 
organized  which,  in  the  face  of  the  serious  financial  situa- 
tion, was  inclined  to  grant  increases  in  wages  only  after 
being  clubbed  into  submission. 

One  of  the  divisions  set  up  by  the  federal  administra- 
tion was  the  Division  of  Labor,  the  head  of  which  was 
the  chief  of  the  Brotherhood  of  Railroad  Firemen  and 
Enginemen.  One  of  the  first  general  orders  of  the  Direc- 
tor-General created  a  Railroad  Wage  Commission,  under 
instructions  to  make  a  broad  general  investigation  that 
should  include  the  relation  of  railroad  wages  to  those  in 
other  industries,  and  the  relation  of  different  classes  of 
labor  to  each  other,  the  wage  conditions  in  different  parts 
of  the  country,  the  immediate  emergency  of  the  war,  and 
the  high  cost  of  living.  The  recommendations  of  this 
Commission  for  immediate  relief  were  based  upon  an  in- 
vestigation of  the  increase  in  living  costs  since  December, 
1915,  and  recommended  increases  for  all  employees  re- 
ceiving less  than  $250  per  month,  graded  from  an  increase 
of  43  per  cent  for  all  receiving  $50  per  month  and  not 
less  than  $46  (under  $46  a  flat  increase  of  $20),  down  to 
an  increase  of  $i  for  those  receiving  above  $248  and  not 

;more  than  $249  per  month.  These  increases  were  applied 
to  the  rates  in  effect  December  31,  1915,  and  were  to  be 
diminished  by  the  amount  of  any  increase  received  since 
that  time.  Reductions  in  hours  were  not  to  be  regarded 
as  increases  in  pay.  Existing  hours  of  service  and  exist- 
ing rules  and  conditions  of  payment  were  not  to  be  dis- 
turbed during  the  war  period.  It  was  pointed  out  that 
80  per  cent  of  the  employees  were  receiving  not  over  $100 
per  month,  and  that  the  number  receiving  from  $150  to 


THE  GOVERNMENT  AND   LABOR  l8l 

$250  per  month  included  less  than  3  per  cent  (excluding 
officers). 

Director- General  McAdoo,  in  putting  this  award  into 
effect,  made  some  additional  increases  by  way  of  the 
establishment  of  minima  for  the  shop  crafts  and  common 
labor,  but  the  most  significant  departure  from  the  recom- 
mendations of  the  Wage  Commission  was  the  formal  rec- 
ognition of  the  principle  of  the  "basic  .eight-hour  day" 
in  all  railroad  employment,  a  principle  which  had  been 
sanctioned  by  law  for  the  train  organizations  through 
the  passage  of  the  Adamson  Act.  However,  overtime 
was  to  be  paid  pro  rata  unless  existing  agreements  pro- 
vided otherwise. 

Following  the  suggestion  of  the  Wage  Commission,  a 
Board  of  Railroad  Wages  and  Working  Conditions,  ad- 
visory to  the  Director- General,  was  set  up  to  hear  and 
investigate  matters  relating  to  inequalities  in  pay  and 
regulations  and  the  larger  questions  of  labor  policy. 
There  were  also  created  in  succession  four  bipartisan 
boards  of  adjustment,  consisting  equally  of  represen- 
tatives of  the  railroads  and  the  employees,  to  which  under 
a  signed  "memorandum  of  understanding"  the  railroad 
managements  and  the  unions  of  organized  employees 
agreed  to  submit  their  controversies  growing  out  of  the 
interpretation  of  wage  schedules,  that  could  not  be  ad- 
justed locally  on  the  individual  systems.  For  the  ad- 
justment of  disputes  with  unorganized  employees,  an  of- 
ficial was  appointed  under  the  Division  of  Labor  of  the 
Railroad  Administration. 

So  far  as  wages  were  concerned,  the  increases  granted 
by  the  original  Wage  Commission  proved  inadequate, 
particularly  for  those  classes  that  had  received  increases 
since  December,  1915.  The  outcome  was  an  apparently 
endless  series  of  increases  for  various  classes,  including 
the  shop  crafts,  clerks,  telegraphers,  employees  of  express 
and  sleeping-car  companies,  and  finally  the  four  brother- 


182  RAILROADS  AND   GOVERNMENT 

hoods  in  April,  1919.  The  Board  of  Railroad  Wages  and 
Working  Conditions  announced  that  these  increases  were 
generally  less  than  those  granted  for  similar  work  outside, 
but  were  awarded  with  the  idea  of  creating  a  wage  struc- 
ture that  would  survive  the  war  period.  This  war  cycle 
of  wage  increases,  officially  declared  to  be  complete  in 
the  spring  of  1919,  had  accumulated  an  addition  to 
operating  expenses  estimated  at  $965,000,000  per  year. 
The  table1  on  the  following  page,  prepared  by  the  Rail- 
road Administration,  analyzes  these  increases  for  the  two 
years,  and  shows  when  each  increase  became-  effective. 
According  to  Director- General  Hines,  the  increases  when 
measured  on  the  basis  of  hourly  rates  were  only  slightly 
over  100  per  cent,  which  were  not  as  great  as  in  many 
other  industries. 

But  the  employees  were  by  no  means  satisfied.  Com- 
paring their  increases  with  those  of  men  engaged  in  non- 
railroad  employment  and  feeling  the  pressure  of  a  con- 
stantly rising  cost  of  living,  all  classes  made  further 
demands.  Unauthorized  strikes  broke  out,  and  the  trouble 
came  to  a  head  in  August  when  the  question  was  officially 
taken  up  by  the  President  of  the  United  States.  He  took 
the  ground  that  no  general  demands  for  permanent  in- 
creases should  be  granted  until  the  question  could  be 
determined  whether  the  prevailing  cost  of  living  was  to 
continue  indefinitely.  It  was  the  time  when  the  Attor- 
ney-General was  making  his  spectacular  and  futile  de- 
scent upon  the  alleged  profiteer,  and  the  employees  at 
the  suggestion  of  the  President  laid  aside  their  demands 
to  await  the  fall  in  the  cost  of  living  which  they  were 
given  to  think  was  speedily  to  result  from  the  Adminis- 
tration's policy.  Of  course  nothing  came  of  it,  and  early 
in  1920  the  employees  urged  a  prompt  granting  of  the 
increases  on  the  ground  that  a  sufficient  time  had  elapsed 

IFrom  hearing  before  subcommittee  of  House  Committee  on  Ap- 
propriations, April  12,  1920,  page  210. 


THE  GOVERNMENT  AND   LABOR 


183 


ESTIMATED   ANNUAL  INCREASES  IN  COMPENSATION 
BASED  UPON  AWARD  OF  RAILROAD  WAGE  COM- 
MISSION AND  SUPPLEMENTS  THERETO 


EMPLOYEES 
AFFECTED 

EFFECTIVE 
DATE 

ESTIMATED  AN- 
NUAL INCREASE 
IN  PAY-ROLL, 
CHARGEABLE  TO 
OPERATING    EX- 
PENSES 

1918 

General  Order  27  (sub- 

All employees 

Jan.  I 

$360,000,000 

stantially  recommen- 

receiving less 

dation  of  Lane  Com- 

than $250  per 

mission) 

month 

Supplement  No.  4 

Shop  employ- 

ii 

209,000,000 

ees 

Supplements  7  and  8 

Maintenance 

Sept.  i 

I9O,OOO,OOO 

of  way  em- 

ployees and 

clerks 

Supplement  13 

Agents  and 

Oct.  i 

25,000,000 

operators 

1919 

Supplements  14,  17,  and 

Policemen, 

Jan.  i 

8,OOO,OOO 

18 

dining  and 

sleeping  car 

employees 

Supplements  15  and  16 

Enginemen 

ii 

60,000,000 

and  trainmen 

Increase   in   pay   under 

Shop  employ- 

May i 

5O,OOO,OOO 

equalization    adjust- 

ees 

ment  effective  May  I, 

1919 

Time   and  one-half   for 

Enginemen 

Dec.  I 

38,OOO,OOO 

overtime  allowed 

and  trainmen 

in  road  freight 

service 

Time  and  one-half  for 

Maintenance 

Dec.  16 

overtime    and    other 

of  way  em- 

1919 

adjustments  in  pay 

ployees 

25,000,000 

Clerks 

Jan.  i 

1920 

Total  

$965,OOO,OOO 

184  RAILROADS   AND   GOVERNMENT 

to  demonstrate  that  the  high  level  of  prices  was  to  con- 
tinue. But  the  President  now  urged  that  they  should 
await  the  return  of  the  roads  to  their  owners,  which  had 
already  been  arranged  for,  and  should  make  use  of  what- 
ever machinery  for  labor  adjustment  Congress  might 
provide  in  the  legislation  then  pending.  Following  the 
passage  of  the  Transportation  Act  of  1920,  it  took  still 
further  outbreaks  on  the  part  of  labor  and  urgent  solicita- 
tion on  the  part  of  the  labor  leaders  to  obtain  action  by 
the  President  for  the  appointment  of  the  Railroad  Labor 
Board,  upon  the  shoulders  of  which  now  fell  the  accu- 
mulated burden  of  a  year  of  labor  controversy.  It  has 
been  necessary  to  describe  in  detail  the  slow  and  reluctant 
steps  in  the  history  of  labor's  efforts  to  get  satisfaction, 
in  order  that  one  may  appreciate  the  significance  of  the 
outlaw  strikes  of  1920  and  the  difficulties  that  labor 
leaders  experienced  in  keeping  their  membership  in  hand. 
Dissatisfaction  with  the  dilatoriness  of  the  Government 
was  wide-spread  and  anarchic  elements  were  quick  to 
take  advantage  of  the  situation.  While  the  federal  ad- 
ministration had  doubtless  some  defense  for  its  attitude 
in  the  impending  return  of  the  roads  to  their  owners,  yet 
a  careful  survey  of  the  last  year  of  federal  operation  re- 
flects little  glory  upon  its  handling  of  the  labor  situation 
in  its  broad  national  aspects.  It  is  a  period  which  should 
be  thoughtfully  investigated  by  one  who  is  attempting 
to  decide  whether  Government  operation  of  railroads  is 
the  proper  policy  for  the  United  States. 

From  the  standpoint  of  those  who  are  seeking  a  satis- 
factory form  of  organization  for  the  peace-time  settle- 
ment of  industrial  conflicts,  the  bipartisan  adjustment 
boards  of  the  war  period  are  of  more  than  transitory 
interest.  These  boards  were  proposed  by  Director  Car- 
ter of  the  Division  of  Labor  as  a  means  of  restoring  the 
morale  and  efficiency  of  the  employees  and  as  a  substitute 
for  the  arbitration  board  which  had  proved  so  unsatis- 


THE  GOVERNMENT  AND  LABOR          185 

factory  in  the  pre-war  period.  It  was  argued  by  the  Di- 
rector that  partisanship  would  disappear  and  judicial- 
mindedness  would  take  its  place  when  there  was  no 
longer  a  neutral  arbitrator  present  to  divide  the  forces 
into  hostile  camps.  That  these  four  boards  accomplished 
the  work  assigned  them  with  extraordinary  success,  there 
is  no  doubt.  The  labor  leaders  stood  by  the  Govern- 
ment. A  large  majority  of  the  decisions  of  these  boards 
were  unanimous,  and  there  was  agreement  in  practically 
every  one  of  the  thousands  of  cases  before  them.  Rail- 
road Adjustment  Board  No.  i,  which  took  jurisdiction 
over  controversies  involving  the  four  brotherhoods,  func- 
tioned more  smoothly  than  the  other  three,  because 
negotiations  in  this  field  were  based  on  a  longer  experi- 
ence with  collective  bargaining.  In  every  case  that  came 
before  it  its  decision  was  unanimous. 

The  origin  of  this  particular  board  is  interesting.  It 
will  be  recalled  that  in  March,  1917,  a  committee  of  the 
Council  of  National  Defense  intervened,  at  the  request 
of  the  President,  to  prevent  a  strike  of  the  four  brother- 
hoods over  their  demand  for  the  immediate  introduction 
of  the  eight-hour  day.  Their  award  was  accepted  by 
carriers  and  employees,  but  it  had  to  be  applied  to  150 
railroads  with  their  hundreds  of  individual  contracts  and 
with  their  complex  and  varied  agreements.  It  was  ob- 
vious that  controversies  would  arise  and  that  some  agency 
would  be  necessary  to  interpret  the  agreements.  Ac- 
cordingly, the  railroads  and  the  brotherhoods  set  up  a  bi- 
partisan commission  of  eight  members  as  interpreter  of 
agreements.  This  "Commission  of  Eight"  was  in  ex- 
istence until  superseded  by  Railroad  Adjustment  Board 
No.  i,  four  of  the  old  members  taking  places  on  the  new 
board. 

The  success  of  the  Commission  of  Eight  and  likewise 
of  its  successor,  both  from  the  standpoint  of  the  perform- 
ance of  its  specific  job  and  from  that  of  its  ultimate  effect 


1 86  RAILROADS  AND   GOVERNMENT 

upon  the  public  welfare,  is  due  to  two  facts.  First,  it 
was  a  board  of  experts  of  long  experience  in  dealing  with 
the  intricate  questions  of  railroad  wage  schedules.  There 
was  no  guessing,  no  splitting  of  differences.  Decisions 
were  the  reasoned  judgment  of  experience.  In  the  sec- 
ond place,  its  authority  was  strictly  limited.  It  had  no 
power  to  fix  new  wage  scales  or  conditions  of  employ- 
ment. Its  duty  was  to  interpret  and  apply  wage 
schedules  already  generally  in  force.  There  is  no  oppor- 
tunity under  such  limitations  for  collusion  between  rail- 
roads and  employees  at  the  expense  of  the  public.  A  bi- 
partisan board  with  power  to  make  an  initial  wage  award, 
and  hence  in  position  to  pass  over  to  the  public  what- 
ever increases  it  sees  fit  to  make,  would  be  quite  another 
matter. 

Increase  in  the  wage  bill  was  not  the  only  result  of  the 
labor  machinery  set  up  during  the  war,  nor  was  it  the 
most  significant  result.  The  increases  were  inevitable 
and,  as  has  already  been  said,  were  moderate  compared 
with  those  made  outside.  Of  much  more  significance 
were  the  standard  rules  and  working  conditions  that 
emanated  from  this  centralized  authority.  At  the  very 
beginning  of  federal  operation  the  Director-General  an- 
nounced that  no  discrimination  would  be  made  in  em- 
ployment because  of  membership  or  non-membership  in 
labor  organizations.  This  had  very  definite  results.  It 
provoked  a  declaration  by  the  unions  in  favor  of  the 
open  shop,  and  an  assurance  of  benefits  to  non-union 
employees  under  existing  agreements  equal  to  those  ac- 
corded to  members.  It  stimulated  the  introduction  of 
unionism  upon  roads  where  it  had  not  before  prevailed 
and  where  in  many  cases  it  had  been  definitely  prohibited 
by  the  managements. 

As  already  indicated,  the  Director- General  formally 
established  the  basic  eight-hour  day  for  all  railroad  labor. 
This  was  followed  up  by  supplementary  orders  based 


THE  GOVERNMENT  AND  LABOR  187 

upon  recommendations  of  the  Board  of  Railroad  Wages 
and  Working  Conditions,  which  contributed  materially 
to  convert  a  theoretical  into  an  actual  eight-hour  day. 
Where  previous  to  federal  control  classes  of  labor  had  by 
negotiation  secured  to  a  considerable  extent  the  eight- 
hour  day  with  time  and  a  half  for  overtime,  the  policy 
was  extended  to  all  employees  in  that  class  throughout 
the  country.  Where  labor  had  not  won  this  advanced 
position  previous  to  federal  control,  pro  rata  payment 
was  authorized  for  the  ninth  and  tenth  hours  and  time 
and  a  half  thereafter.  In  connection  with  the  establish- 
ment of  this  basic  policy  the  Director- General,  in  order 
to  meet  the  emergency  demands  for  repair  of  equipment, 
appealed  to  the  shop  forces  as  a  patriotic  duty  to  accept 
an  arrangement  for  a  seventy-hour  week.  This  was  ef- 
fected and  continued  in  force  until  the  armistice,  when 
it  was  promptly  reduced  to  the  eight-hour-day  basis  with 
time  and  a  half  for  overtime.1 

Under  the  same  central  organization,  standard  work- 
ing rules  were  established  providing  for  uniform  adminis- 
tration of  discipline  and  the  maintenance  of  seniority 
principles.  The  question  of  the  continuation  or  aboli- 
tion of  piece-work  in  the  shops  was  put  to  a  vote  of  the 
employees  themselves,  and  following  the  will  of  a  "sub- 
stantial majority"  piece-work  was  done  away  with  on 
one  road  after  another.  There  was  to  be  no  discrimina- 
tion in  pay  for  women's  labor  and  that  of  colored  em- 
ployees. 

Inevitably  the  standardizing  process  led  up  to  the 
movement  for  national  agreements  that  would  assure 
uniform  conditions  throughout  the  country.  In  contrast 

1  The  Railroad  Administration  conceded  to  men  in  freight  service, 
for  the  abandonment  of  certain  allowances  and  arbitraries,  time  and 
one-half  for  overtime,  effective  December  i,  1919.  This  was  the  fea- 
ture that  had  been  waived  at  the  time  of  the  passage  of  the  Adamson 
Eight  Hour  Law. 


l88  RAILROADS  AND  GOVERNMENT 

with  the  situation  among  the  trainmen,  the  shop  crafts, 
when  the  roads  were  taken  over,  were  working  under  dif- 
ferent rates  and  different  conditions  on  the  various  roads, 
and  were  even  shifting  from  one  road  to  another  to  take 
advantage  of  superior  conditions.  After  much  negotia- 
tion a  national  agreement  was  finally  approved  and  made 
effective  October  20,  1919,  which  defined  the  working 
conditions  with  more  particularity  than  was  done  in  the 
general  orders  issued  by  the  Administration.  This  agree- 
ment was  followed  by  one  with  the  maintenance-of-way 
employees,  effective  in  December.  Another  was  signed 
with  the  clerks,  effective  January  i,  1920,  another  with 
the  firemen  and  oilers,  January  16,  and  finally  one  with 
the  signalmen,  effective  February  i,  1920.  It  should  be 
observed  that  all  of  these  agreements  were  negotiated 
jafter  the  President  had  announced  his  intention  to  re- 
turn the  roads  to  their  owners,  and  that  three  of  them 
were  signed  after  the  President  had  issued  his  proclama- 
tion of  relinquishment. 

It  was  these  national  agreements,  standardizing  prac- 
tice throughout  the  country  irrespective  of  local  condi- 
tions, that  furnished  the  matter  of  most  serious  contro- 
versy before  the  Railroad  Labor  Board  after  the  return 
of  the  roads  to  their  owners,  and  the  issue  involved  will 
be  discussed  in  the  later  connection.  It  is  sufficient  at 
this  point  to  note  the  gains  that  railroad  labor  made  in 
its  strategic  position  during  the  period  of  the  war.  It 
deserves  great  credit  for  its  loyal  and  efficient  service, 
and  the  country  is  particularly  under  obligation  to  its 
leaders  for  their  patience  and  restraint  during  the  trying 
year  and  a  half  following  the  armistice,  when  the  Gov- 
ernment put  them  off  with  one  pretext  after  another. 
But  for  all  this  they  exacted  their  pay.  Their  goal  was 
a  definite  one,  and  they  advanced  toward  it  with  un- 
wavering step.  Their  purpose  could  not  be  better  stated 
than  in  the  words  of  Director-General  McAdoo  in  his  an- 


THE   GOVERNMENT  AND   LABOR  189 

nual  report  for  1918.  "But  for  the  possible  early  return 
of  the  railroads  to  private  control  it  could  safely  be  said 
that  the  logical  conclusion  of  the  work  of  the  present 
Board  of  Railroad  Wages  and  Working  Conditions  would 
be  standardized  rates,  standardized  days,  and  other  stand- 
ardized conditions  of  employment  for  all  employees  on 
railroads  under  federal  control." 

It  is  not  without  significance  that  the  leaders  of  the 
railroad  unions  and  a  large  body  of  the  membership  in- 
dorsed the  movement  for  permanent  nationalization  fol- 
lowing the  war  experience.  This  sudden  shifting  of  posi- 
tion on  the  part  of  the  leaders,  most  of  whom  had  pre- 
viously been  opposed  to  the  policy,  can  be  interpreted  as 
a  shrewd  estimate  of  what  federal  management  meant  to 
them.  They  had  had  their  first  taste  in  the  Adamson  Act. 
Upon  this  as  a  foundation  they  built  up  their  powerful 
national  organization  of  the  war  time,  under  the  sym- 
pathetic observation  of  the  first  Director-  General  and 
with  the  active  assistance  of  his  Director  of  Labor.  It 
is  no  exaggeration  to  say  that  the  gains  made  by  railroad 
labor  during  the  twenty-six  months  of  federal  operation 
in  the  power  of  collective  bargaining,  in  the  development 
of  union  organization,  in  the  standardization  and  nation- 
alization of  practices  and  policies,  were  greater  than  in 
the  entire  previous  period  of  their  existence.  That  they 
desire  to  perpetuate  these  gains  under  private  operation 
is  no  more  than  human. 

To  the  question  of  the  loyalty  and  efficiency  with  which 
labor  worked  during  federal  operation,  there  is  no  exact 
answer  possible.  There  was  a  constant  turnover  due  to 
the  greater  attractiveness  of  other  industry  and  to  the 
call  for  military  service.  Labor  was  diluted  and  inef- 
ficiency resulted.  The  patriotic  stimulus  during  1918 
doubtless  kept  the  labor  effort  up  to  the  maximum,  but 
it  was  not  as  productive  as  pre-war  labor.  Under  the 
uncertain  conditions  of  the  following  year,  when  employees 


190 


RAILROADS  AND   GOVERNMENT 


were  in  doubt  as  to  who  their  future  employer  was  to  be, 
when  agitation  for  Government  ownership  was  active 
among  them,  when,  moreover,  the  development  of  na- 
tional standards  and  the  increasing  centralization  of  wage 
adjustment  were  breaking  down  the  old  personal  relation- 
ship between  manager  and  men,  there  was  a  noticeable 
decline  in  morale  and  a  lessening  of  efficiency.  However, 
it  was  the  conclusion  of  Director- General  Hines,  reached 
after  long  and  careful  observation  of  the  labor  situation, 
that  the  war  spirit  resulted  in  less  effective  work  every- 
where, and  that  on  the  whole  the  decline  in  efficiency 
was  greater  in  other  lines  of  industry  than  on  the  rail- 
roads. 

The  frequently  reiterated  charge  that  the  federal  ad- 
ministration carried  on  its  pay-rolls  several  hundred  thou- 
sand unnecessary  employees  had  no  basis  in  fact,  and  arose 
from  the  general  introduction  of  the  eight-hour  day,  which 
increased  necessarily  the  number  of  persons  performing 
the  work.  Director-General  Hines  in  his  final  report 
presented  a  table  showing  that  while  the  number  of  em- 
ployees increased,  the  number  of  hours  worked  remained 
almost  the  same,  and  in  1919  slightly  declined.  Neither 
did  the  hours  worked  keep  pace  with  increase  in  traffic. 
Portions  of  this  table  are  here  reproduced. 


CALENDS 

jt  YEAR 

1916 

1917 

1918 

1919 

(Partly  esti- 
mated) 

Number  of  employees.  . 
Hours  worked  
Average  hours  per  em- 
ployee per  month.  .  . 

1,647,097 
5,189,790,716 

263 

1,723,734 
5,406,878,384 

261 

1,820,660 
5,641,820,405 

258 

1,891,607 
5,126,142,664 

226 

Per  cent  of  year  1916: 
Hours  worked  

IOO 

104.2 

108.7 

98.8 

Revenue  ton-miles.  . 
Passenger-miles  

IOO 
IOO 

108.3 
113-8 

III.  2 
122-9 

100.2 
133-6 

CHAPTER  XIV 

FINANCIAL  RESULTS.      SUMMARY  OF  FEDERAL  OPERATION1 

No  complete  income  account  or  balance-sheet  has  been 
issued  by  the  Railroad  Administration  that  shows  in 
simple  fashion  the  transactions  between  the  railroads 
and  the  Government.  In  fact,  there  have  been  so  many 
offsetting  accounts  and  adjustments  that  probably  no 
such  simplified  statement  is  possible.  It  is  not  the  in- 
tention here  to  follow  this  financial  relationship  in  de- 
tail, but  merely  to  set  forth  the  significant  transactions 
and  the  more  important  results.  In  any  survey  of  the 
finances  of  the  period  it  should  be  recalled  that  the  Gov- 
ernment's interest  did  not  end  with  the  return  of  the 
roads  to  their  owners,  but  continued  for  an  additional 
six  months  in  the  form  of  a  guarantee,  which  was  an  ex- 
tension of  the  contract  of  the  control  period.  From  the 
standpoint  of  finance  there  is  little  distinction  between 
the  two  periods,  and  they  will  be  treated  together  in  this 
discussion. 

The  terms  of  the  contract  between  Government  and 
railroads  need  not  be  repeated  in  detail,  but  the  pertinent 
provisions  should  here  be  recalled.  In  addition  to  the 
guarantee  of  an  annual  net  operating  income  equivalent 
to  the  average  of  the  three  test  years,  the  Director- General 
was  required  to  charge  to  operating  expense  a  sufficient 
amount  for  maintenance  and  depreciation  to  make  sure 
that  the  roads  would  be  returned  to  their  owners  in  as 
good  condition  as  when  received.  Any  excess  expendi- 
tures deemed  necessary  in  the  interest  of  safety  to  over- 
come previous  undermaintenance  were  to  be  charged  to 

1  In  the  preparation  of  this  chapter  the  author  has  been  greatly 
assisted  by  studies  (unpublished)  made  by  the  Bureau  of  Railway 
Economics. 

191 


1 92  RAILROADS  AND  GOVERNMENT 

the  roads.  Additions  and  betterments  that  were  under- 
taken for  war  purposes  were  to  be  paid  for  by  the  Govern- 
ment, all  others  were  to  be  charged  to  the  carriers.  But 
no  deduction  from  the  amount  owed  by  the  Government 
to  the  roads  could  be  made  by  the  Government  to  cover 
maintenance  or  betterments  that  would  impair  the  ability 
of  the  carriers  to  meet  interest,  sinking-fund,  and  tax  re- 
quirements. The  Director- General  could  allocate  motive 
power  to  the  roads  to  the  extent  he  deemed  necessary. 
The  $500,000,000  revolving  fund  might  be  used  by  the 
President  not  only  to  cover  deficits  in  operation  but  to 
provide  for  additions  and  betterments,  to  cover  matur- 
ing obligations,  to  reorganize  bankrupt  roads,  and  to 
purchase  the  securities  of  the  roads.  In  other  words, 
the  Government's  funds  were  to  be  used  for  two  main 
purposes:  first,  to  cover  any  deficit  necessary  to  fulfil  the 
contract  with  the  carriers,  and,  second,  to  provide  capital 
necessary  for  additional  facilities  and  for  refunding. 

In  the  first  place,  it  will  be  necessary  to  determine  the 
total  of  funds  available  to  the  federal  administration, 
which  it  employed  in  its  capacity  as  lessee  of  the  rail- 
roads. By  the  Federal  Control  Act  of  March  1918, 
$500,000,000  was  appropriated  as  a  revolving  fund  to  be 
used  for  the  various  purposes  already  described.  This 
fund  proved  insufficient  to  meet  the  operating  deficit 
of  1918,  to  provide  for  necessary  additions  and  better- 
ments, and  to  take  care  of  critical  financial  situations  on 
certain  properties.  Accordingly,  a  request  was  made  in 
January  1919,  for  an  additional  appropriation  of  $750,- 
000,000.  It  is  not  without  its  bearing  upon  the  funda- 
mental problem  whether  a  Government  can  safely  be 
intrusted  in  time  of  peace  with  the  management  of  its 
transportation  facilities  that  this  appropriation  failed 
of  passage  in  the  Senate  because  of  a  political  filibuster, 
creating  thereby  a  most  serious  situation  in  the  Railroad 
Administration,  and  compelling  resort  to  every  possible 


FINANCIAL   RESULTS  193 

expedient  to  secure  funds.  Payment  of  bills  was  post- 
poned, loans  were  called,  the  assistance  of  the  War 
Finance  Corporation  was  invoked,  the  War  Department 
paid  $100,000,000  of  claims  without  waiting  for  the  neces- 
sary vouchers.  By  the  time  Congress  met  in  extraor- 
dinary session,  the  request  of  the  Railroad  Administra- 
tion had  increased  to  $1,200,000,000,  but  Congress  appro- 
priated only  the  $750,000,000  originally  asked  for.  This 
was  available  on  July  i. 

The  request  for  $1,200,000,000  had  been  based  upon 
the  belief  that  deficits  in  operation  were  at  an  end.  But 
with  the  fall  of  the  year  came  the  steel  and  coal  strikes 
and  the  sharp  decline  in  earnings.  This,  combined  with 
the  fact  that  the  congressional  appropriation  fell  short 
of  the  estimated  requirements  by  $450,000,000,  again 
placed  the  Railroad  Administration  in  a  position  of  finan- 
cial difficulty.  But  no  further  appropriations  were  avail- 
able until  the  passage  of  the  Transportation  Act  of  1920. 
In  that  measure  Congress  appropriated  $200,000,000  for 
the  purpose  of  winding  up  the  Government's  relations 
to  the  railroads,  and,  in  response  to  the  request  of  Direc- 
tor-General Hines  in  April  following,  appropriated  an 
additional  $300,000,000.  Therefore  there  was  available 
to  the  Railroad  Administration  from  January  i,  1918,  to 
September  i,  1920,  by  direct  grant  a  total  of  $1,750,- 
000,000. 

Furthermore,  the  Transportation  Act  of  1920  provided 
that  any  valid  claims  against  the  Administration  arising 
out  of  transactions  during  the  period  of  federal  control 
should  be  paid  out  of  the  loan  fund  which  the  Act  estab- 
lished. These  claims  have  been  estimated  at  $40,000,- 
ooo,  and  this  amount  should  be  added  to  the  assets  of 
the  Administration,  making  a  total  available  by  con- 
gressional grant  of  $1,790,000,000. 

Technically  speaking,  the  Administration's  treasury 
was  also  enhanced  by  its  expropriation  of  cash  balances 


IQ4  RAILROADS   AND   GOVERNMENT 

from  the  railroad  treasuries — "working  balances,"  as 
they  were  called.  These  balances,  taken  over  at  the  be- 
ginning of  federal  control,  aggregated  over  $300,000,000. 
But  it  should  be  noted  that  at  the  same  time  the  Ad- 
ministration assumed  outstanding  current  liabilities  to  an 
amount  estimated  to  be  in  excess  of  the  cash  obtained. 
Hence,  these  additional  funds  had  little  or  no  significance 
for  the  transactions  of  the  control  period. 

Reference  has  already  been  made  to  the  assistance  of 
the  War  Finance  Corporation  during  the  trying  months 
of  1919.  Certificates  of  indebtedness  were  issued  by  the 
Government  to  roads  in  lieu  of  cash  to  the  amount  of 
$193,000,000,  which  the  roads  used  as  collateral  for  loans, 
either  from  the  banks  or  the  War  Finance  Corporation, 
to  the  extent  of  about  80  per  cent  of  their  face  value,  the 
Government  agreeing  to  reimburse  the  roads  for  the 
difference  between  the  5  per  cent  interest  that  the  cer- 
tificates bore  and  a  maximum  of  6  per  cent  that  the  rail- 
roads might  have  to  pay.  These  certificates  to  the  amount 
of  $92,000,000  were  likewise  issued  to  equipment  compa- 
nies to  whom  payments  were  due.  They  were  all  retired 
out  of  the  $750,000,000  appropriation  available  July  i. 

The  operating  side  of  the  Government's  account  may 
best  be  presented  in  tabular  form.1 

Deficit  from  operation  of  Class  I  roads,  Jan.,  igiS-Feb., 

1920 $677,513,152 

Deficit,  other    railroads,    Pullman    Co.,  refrigerator-car, 

and  steamship  lines 43,011,129 

Deficit,  American  Railway  Express 38,111,742 

Deficit,  inland  waterways 2,449,739 

Amount  needed  to  replace  stocks  of  materials  and  supplies 

taken  over 85,204,618 

Net  interest  and  other  debt  adjustments 40,233,396 

Expenses  R.  R.  Administration  to  March  i,  1920 i3.954»98o 


$900,478,756 

1  From  statement  of  Director-General  Hines  before  subcommittee 
of  House  Committee  on  Appropriations,  April  1920,  page  84. 


FINANCIAL  RESULTS  195 

In  addition,  the  administrative  expenses  of  the  Railroad 
Administration  from  March  i,  1920,  to  December  31, 
1920,  were  estimated  at  $3,445,222,  which  brought  the 
total  net  loss  through  1920  up  to  $903,923,978. 

In  a  letter  to  the  House  Committee  on  Appropriations 
dated  May  5,  1921,  Director- General  Davis,  in  charge 
of  the  liquidation  of  the  affairs  of  the  Railroad  Adminis- 
tration, raised  the  estimate  of  the  operating  loss  to  the 
Government  considerably  beyond  that  of  Mr.  Hines  in 
the  previous  year — the  result  of  more  complete  informa- 
tion in  relation  to  the  contract  obligations  of  the  Gov- 
ernment. The  controversy  as  to  whether  the  short  lines 
were  under  federal  control  and  were  entitled  to  com- 
pensation for  the  first  six  months  of  1918  before  they 
were  formally  relinquished  having  been  decided  by 
referees  in  favor  of  the  railroads,  an  allowance  for  this 
had  to  be  added.  Unfinished  contracts  on  inland  water- 
ways were  by  the  Transportation  Act  of  1920  made  an 
obligation  of  the  Railroad  Administration.  Then  there 
were  claims  for  loss  and  damage  arising  out  of  the  Mimie- 
sota  forest-fire  in  1918,  personal-injury  claims,  fire  losses 
on  carriers'  property,  omitted  or  underestimated  allow- 
ances for  undermaintenance  of  road  and  equipment,  and 
additions  and  betterments  made  solely  for  war  purposes. 
All  of  these  items,  it  was  reckoned,  would  add  $300,- 
000,000  to  the  original  estimate,  thereby  establishing 
an  operating  loss  of  over  $1,200,000,000. 

But  this  estimate  was  based  upon  the  assumption  that 
the  Administration  could  settle  with  the  roads  under 
its  interpretation  of  the  upkeep  section  of  the  standard 
contract.  It  was  the  contention  of  the  Government  that 
the  contract  recognized  the  impossibility  of  determining 
maintenance  at  the  beginning  and  end  of  federal  control 
by  any  physical  comparison,  and  that  a  full  compliance 
would  be  secured  by  adjusting  differences  by  the  account- 
ing method  and  measuring  the  liability  of  the  Adminis- 


196  RAILROADS  AND   GOVERNMENT 

tration  for  labor  and  materials  by  the  amount  expended 
for  the  same  purposes  during  the  three-year  test  period, 
after  equating  for  changes  in  price.  The  carriers,  on 
the  other  hand,  argued  that  they  were  entitled  to  a 
physical  comparison,  so  that,  quoting  the  standard  con- 
tract, "the  result  shall  be,  as  nearly  as  practicable,  the 
same  relative  amount,  character,  and  durability  of  phys- 
ical reparation."  This  contention  found  its  support  in 
the  demonstrated  " inefficiency  of  labor"  resulting  from 
employment  of  inexperienced  workmen,  the  abolition  of 
piecework,  and  a  generally  lowered  morale.  A  day's  work 
did  not  bring  the  same  result  during  the  war  as  before, 
and  the  loss  to  the  road  was  not  compensated  by  a  pay- 
ment of  the  difference  in  wages.  But  the  fate  of  this  con- 
tention is  probably  indicated  in  the  ruling  of  the  Inter- 
state Commerce  Commission  in  August  1921, l  which  it 
made  in  connection  with  the  fulfilment  of  the  statutory 
mandate  requiring  it  to  determine  the  amount  that  the 
carriers  could  charge  to  maintenance  during  the  six 
months'  guarantee  period.  Had  the  contract  contem- 
plated, says  the  Commission,  a  determination  of  the 
relative  efficiency  of  labor  at  different  periods,  it  would 
have  said  so  in  unmistakable  language.  Any  method 
involving  comparison  of  actual  physical  results  would 
lead  to  prolonged  controversy  and  reliance  upon  opinion. 
The  clear  and  easily  applied  test  was  that  which  was 
based  upon  the  accounts  and  in  which  due  allowance 
was  made  for  changes  in  wages  and  in  hours  of  service 
per  day. 

It  was  Director- General  Hines's  view  that  maintenance 
on  the  whole  had  been  in  accord  with  contract,  that  the 
roads  were  returned  in  as  good  condition  as  they  were 
received.  He  held  that  many  roads  were  overmaintained, 
and  that  this  overmaintenance  would  more  than  offset 
the  undermaintenance  that  prevailed  elsewhere.  But 
1 1.  C.  C.  Finance  Docket  No.  1176. 


FINANCIAL   RESULTS  197 

Director- General  Davis  explained  that  the  claims  for 
undermaintenance  would  run  from  $700,000,000  to 
$800,000,000  when  all  the  roads  had  completed  their 
surveys,  and  that  as  the  Administration's  claims  for  over- 
maintenance  were  not  sufficient  in  amount  to  offset  these 
demands,  some  allowance  would  have  to  be  made  for 
this  item.  However,  he  reported  that  he  had  settled 
claims  up  to  July  15,  1921,  aggregating  $226,000,000  for 
$68,000,000,  which  seems  to  indicate  that  the  railroads 
had  exaggerated  their  claims  for  trading  purposes,  and 
were  disposed  to  shrink  them  in  face  of  an  offer  of  cash. 
There  is  no  way  of  reaching  an  accurate  conclusion 
as  to  the  condition  of  maintenance  of  way  and  equipment 
at  the  end  of  federal  control.  No  physical  inventory  of 
materials  and  supplies  was  made  when  the  systems  were 
taken  over,  neither  was  there  any  physical  survey  of  the 
roads  themselves.  In  1919  there  was  a  disposition  on 
the  part  of  the  Director-General,  because  of  the  operat- 
ing deficit,  to  reduce  maintenance  expenditures  to  the 
narrowest  limits.  It  was  evidently  easier  and  safer  to 
entertain  claims  for  undermaintenance  from  the  roads 


J.J 

than  to  prove  and  sustain  the  fact  of  overexpenditure 


^ 
when  the  final  settlement  day  should  come.    There  is  gen- 


eral agreement  among  unprejudiced  experts  that  in  those 
items  capable  of  measurement,  such  as  ties,  rails,  and 
ballast,  deficiency  undoubtedly  existed.  Way  and  struc- 
tures, generally  speaking,  were  in  poorer  condition  at  the 
end  of  the  period  than  at  the  beginning.  While  loco- 
motives were  well  maintained,  cars  were  not.  Physical 
depreciation  there  undoubtedly  was,  but  the  carriers  were 
unable  to  establish  the  claim  and  to  make  it  consistent 
with  a  reasonable  interpretation  of  contract  requirements. 
The  Administration  policy  concerning  capital  expendi- 
tures and  the  method  of  payment  therefor  by  the  car- 
riers has  aroused  much  public  interest  and  comment 
and  prolonged  controversy.  It  is  therefore  of  importance 


198  RAILROADS  AND   GOVERNMENT 

to  consider  it  in  detail.  Based  upon  an  investigation  of 
capital  needs  made  immediately  upon  the  initiation  of 
federal  control,  there  was  authorized  by  the  Division  of 
Capital  Expenditures  during  1918  the  amount  of  $1,279,- 
000,000,  of  which  $573,000,000  was  for  additions  and 
betterments,  $659,000,000  for  equipment,  and  $47,000,- 
ooo  for  extensions,  branches,  and  other  lines.  Aside  from 
appropriations  made  directly  for  war  purposes,  approval 
was  confined  to  such  expenditures  as  were  necessary  for 
safety  in  operation,  or  to  provide  a  needed  increased  ca- 
pacity, and  any  expenditure  not  required  for  these  pur- 
poses was  in  most  cases  deferred. 

The  policy  was  laid  down  by  the  Administration  of 
authorizing  improvements  to  effect  permanent  economies 
only  when  the  economy  was  so  great  that  the  cost  could 
probably  be  saved  during  the  period  of  federal  control. 
Hence  the  large  items  of  expenditures  were  additional 
main  tracks,  yard  tracks  and  sidings,  shop  buildings, 
engine-houses  and  appurtenances,  and  locomotives  and 
cars.  Standardized  locomotives  to  the  number  of  1,930 
were  ordered  and  100,000  freight-cars  of  the  less  special- 
ized types.  No  passenger-cars  of  any  sort  were  purchased 
by  the  Railroad  Administration. 

In  1919,  the  war  having  ceased,  the  Administration  took 
the  position  that  inasmuch  as  it  was  clear  that  Congress 
and  the  people  wished  a  prompt  return  of  the  railroads 
to  private  operation,  no  expenditures  should  be  made 
from  Government  funds  unless  absolutely  necessary. 
Equipment  orders  in  1919  were  confined  to  600  locomo- 
tives, and  in  general  the  expenditures  covered  contracts 
entered  into  previous  to  the  armistice.  Moreover,  the 
failure  of  the  $750,000,000  appropriation  in  March  1919, 
necessitated  rigid  economy  and  forced  a  postponement 
of  even  such  expenditures  as  had  been  contemplated. 
By  the  time  the  money  was  available  in  July,  demands 
of  all  sorts  had  so  increased,  and  the  assurance  of  a  speedy 


FINANCIAL  RESULTS 


199 


return  to  private  operation  was  so  much  greater,  that 
no  projects  of  any  kind  were  undertaken. 

The  following  table,  constructed  from  a  statement  of 
Director- General  Davis  to  the  Senate  Committee  on  Inter- 
state Commerce,  shows  succinctly  how  the  relations  of 
Government  and  carriers  concerning  capital  expenditures 
stood  in  the  spring  of  1921. 

CAPITAL  EXPENDITURES— PERIOD  OF  FEDERAL 
CONTROL 


Expenditures    for    new    equipment 
(100,000   cars  and  2,000  locomo- 
tives) : 
Paid  for  in  cash  by  the  carriers.  .  . 
Equipment    trust    certificates    is- 
sued   

$71,000,000 
310,000,000 

$381,000,000 
763,000,000 

Additions  and  betterments  charge- 
able to  the  carriers: 
Long-term  notes  already  taken  by 
the  Government  

61,000,000 
702,000,000 

Unfunded  

Total  capital  expenditures,  period  of 
federal  control  

$1,144,000,000 

The  average  expenditure  of  less  than  $600,000,000  per 
year  for  the  war  period  is  evidence  of  the  faithfulness 
with  which  the  Administration  adhered  to  the  policy 
of  authorizing  only  such  projects  as  were  imperatively 
needed. 

Equipment  purchased  was  allocated  from  time  to  time 
to  the  various  roads  according  to  the  Administration's 
estimate  of  the  needs  of  the  carriers.  This  policy  aroused 
vigorous  protest  because  of  the  high  cost  of  equipment, 
the  excess  over  normal  being  a  burden  that  the  roads 
insisted  should  be  borne  by  the  Government  as  a  war 
cost.  Moreover,  they  claimed  either  that  they  did  not 


200  RAILROADS  AND  GOVERNMENT 

need  equipment  at  all  or  that  they  could  not  use  the  type 
that  was  assigned  to  them.  This  controversy  was  the 
most  bitter  and  persistent  that  arose  in  the  relations  of 
railroads  to  the  Government  during  the  entire  period 
of  federal  operation.  And  only  when  it  became  clear 
that  they  could  not  buy  equipment  to  any  greater  ad- 
vantage, and  that  the  equipment  must  be  had,  did  the 
carriers  finally  accept  it.  They  were  induced  to  yield  by 
an  arrangement  under  which  the  Government  undertook 
temporarily  to  carry  the  cost  for  them.  Equipment  trusts 
for  100  per  cent  of  the  purchase  price  were  accepted  from 
the  various  roads.  Under  an  act  approved  in  November 
1919,  the  Government  had  the  option  of  holding  these 
notes  until  maturity,  of  selling  them  on  the  market,  or  of 
placing  them  behind  an  issue  of  obligations  by  a  non- 
profit national  equipment  corporation  to  be  organized 
for  the  purpose.  Some  roads  paid  for  the  equipment  in 
cash,  but  many  issued  equipment  notes.  These  were 
held  by  the  Government  and  amounted,  as  shown  in  the 
table,  to  $310,000,000.  They  are  payable  in  annual  in- 
stalments, and  limited  in  maturity  by  statute  to  fifteen 
years. 

It  was  the  opinion  of  Director- General  Davis  that  the 
unfunded  expenditures  for  additions  and  betterments 
would  not  need  to  be  completely  funded,  as  some  com- 
panies would  take  care  of  portions  of  the  indebtedness 
by  cash  payment,  and  others  would  not  be  able  to  furnish 
security  satisfactory  to  the  Government.  He  thought 
the  necessary  funding  would  be  under  $500,000,000. 

In  addition  to  these  investments  there  were  miscellane- 
ous financial  transactions  effected  during  the  war  period 
which  must  be  included.  Long-term  notes  amounting  to 
$44,000,000  consisted  principally  of  collateral  loans  to  the 
New  Haven  road.  Holdings  of  stocks  and  bonds  of  rail- 
road companies  to  the  extent  of  $35,000,000  included 
bonds  of  the  Boston  and  Maine  purchased  to  promote 


FINANCIAL  RESULTS  2OI 

the  reorganization  of  that  road  and  to  finance  certain  ad- 
ditions and  betterments.  In  this  category  was  also  in- 
cluded American  Railway  Express  Company  stock  to  the 
amount  of  $3,600,000  and  Southern  Railway  bonds  for 
$2,350,000.  Receivers'  certificates  were  also  purchased, 
among  them  being  those  of  the  Denver  and  Salt  Lake  and 
the  International  and  Great  Northern. 

There  was  $14,500,000  invested  in  inland  waterways 
represented  by  boats,  barges,  dredges,  and  machinery. 
None  of  this  is  immediately  recoverable,  as  the  Railroad 
Administration  was  instructed  to  turn  over  all  this  prop- 
erty to  the  War  Department. 

The  definitive  obligations  of  the  carriers  held  by  the 
Railroad  Administration  on  August  i,  1921,  including 
equipment  trust  obligations,  amounted  approximately 
to  $440,000,000.  Estimating  the  additions  and  better- 
ments still  to  be  funded  at  $500,000,000,  the  Government 
would  have  an  approximate  total  temporary  investment 
in  the  railroads  of  the  country  of  $940,000,000.  This  is 
on  the  assumption  that  the  securities  held  were  not  to 
be  disposed  of  through  direct  public  sale  or  through  the 
medium  of  the  War  Finance  Corporation  or  other  agency. 
Such  a  stake  in  the  railroads  retained  for  a  decade  might 
exert  a  profound  influence  upon  our  transportation  policy. 

This  financial  estimate  has  had  to  do  with  the  federal- 
control  period  which  ended  on  February  28,  1920.  But 
under  the  terms  of  the  Transportation  Act  the  Govern- 
ment offered  a  shelter  to  the  carriers  for  another  six 
months  in  the  form  of  a  continuation  of  the  standard 
contract.  For  the  roads  that  accepted  this  guarantee 
the  aggregate  Government  obligation  was  an  operating 
income  of  about  $4i8,ooo,ooo.1  As  the  roads  showed  for 
this  period  an  actual  operating  deficit  of  over  $250,000,- 
ooo,  the  cost  to  the  Government  for  the  period  was  $668,- 

1  These  figures  are  for  Class  I  roads  only,  no  others  being  available. 


202  RAILROADS   AND   GOVERNMENT 

000,000.  These  figures  exclude  the  operations  of  thirty- 
nine  Class  I  roads  that  declined  to  accept  the  guarantee 
and  operated  on  their  own  account. 

By  the  Transportation  Act,  detailed  provision  was 
made  for  settlement  of  accounts  between  the  Govern- 
ment and  the  carriers.  Section  207  authorized  the  Gov- 
ernment to  set  off  its  obligations  to  the  roads  against  the 
amounts  due  to  it  "so  far  as  deemed  wise  by  the  Presi- 
dent," but  this  process  of  set-off  was  limited  by  the  terms 
of  the  standard  contract  which  protected  the  roads 
against  being  deprived  of  the  funds  necessary  for  taxes, 
interest,  and  sinking  funds.  Moreover,  this  limitation 
to  the  use  of  the  set-off  method  was  further  extended  to 
protect  the  roads  in  a  continuance  of  the  dividend  pay- 
ments made  during  federal  control,  and  to  assure  them 
a  working  capital  equivalent  to  one-twenty-fourth  of 
their  1919  operating  expenses.  The  remaining  indebted- 
ness not  offset  in  this  manner  could  be  funded  by  the 
carriers  for  a  period  of  ten  years  at  6  per  cent.  Carriers 
might  issue  equipment  trust  securities  to  cover  equip- 
ment purchased  through  the  Government,  and  all  issues 
put  out  by  railroads  under  this  section  were  exempt  from 
the  necessity  of  authorization  by  any  authority,  state  or 
federal. 

Settlement  by  the  Government  was  to  be  made 
promptly  at  the  conclusion  of  the  guarantee  period  upon 
certification  by  the  Commission,  and  it  was  further  ar- 
ranged that  upon  Commission  certification  advances 
might  be  made  during  the  guarantee  period  of  such  sums 
as  were  necessary  to  meet  operating  expenses  and  fixed 
charges,  the  Secretary  of  the  Treasury  being  directed  to 
make  the  payments  upon  the  execution  by  the  carrier  of 
a  contract  which  would  protect  the  Treasury  against 
overpayment.  This  provision  was  interpreted  by  the 
Treasury  to  mean  that  no  partial  payments  could  be 
made  except  during  the  guarantee  period,  and  that  after 


FINANCIAL  RESULTS  203 

its  expiration  only  one  payment  could  then  be  made,  which 
should  cover  a  final  settlement  with  the  carrier.  Due  to 
delays  by  the  railroads  in  preparing  their  claims  and  by 
the  Commission  in  examining  and  certifying  them,  most 
of  the  roads  were  by  this  ruling  deprived  of  any  payments 
at  all  until  they  should  have  reached  a  final  settlement 
with  the  Government.  This  meant  that  approximately 
$600,000,000  was  indefinitely  tied  up  at  the  time  when 
the  roads  were  acutely  in  need  of  funds.  It  was  neces- 
sary to  secure  relief  from  Congress,  which  was  granted 
in  the  form  of  an  amendment  to  the  Transportation  Act 
on  February  26,  1921  (Section  212),  authorizing  the  Com- 
mission to  certify  partial  payments  to  the  carriers  without 
waiting  for  final  settlement  and  directing  the  Treasury 
to  pay  them. 

Because  of  the  difficulty  experienced  by  the  railroads 
in  the  summer  of  1921  in  securing  funds,  and  the  impera- 
tive need  of  such  funds  for  restoring  equipment  and 
liquidating  current  obligations  for  materials  and  sup- 
plies, and  because  of  the  presumed  stimulus  that  the 
supply  of  funds  would  furnish  to  business  in  general, 
urgent  representations  were  made  to  Congress  and  the 
President  against  the  set-off  method  of  adjusting  the 
indebtedness  of  the  carriers  to  the  Government.  In- 
stead of  allowing  the  policy  to  continue  of  funding  the 
net  indebtedness  of  the  railroads  to  the  Government, 
Congress  was  asked  to  authorize  the  machinery  by  which 
the  gross  indebtedness  of  the  carriers  to  the  Government 
might  be  funded,  and  the  carriers  in  their  turn  receive 
in  cash  what  was  owed  to  them  by  the  Government  on 
operating  account.  A  bill  was  introduced  which  con- 
ferred upon  the  War  Finance  Corporation  power  to  pur- 
chase securities  accepted  by  the  Director-General  of 
Railroads  in  the  funding  of  railroad  indebtedness,  and 
therewith  to  provide  the  funds  with  which  to  settle  the 
accounts  of  the  railroads  against  the  Government  for 


204  RAILROADS   AND    GOVERNMENT 

compensation,  depreciation,  and  maintenance.  In  short, 
it  amounted  to  loaning  to  the  railroads  by  the  Govern- 
ment the  difference  between  the  gross  and  the  net  amount 
of  the  debt  owed  to  the  Government  by  the  carriers  for 
additions  and  betterments.  In  connection  therewith 
the  railroads  informally  agreed  to  waive  their  claims  for 
undermaintenance  based  on  the  inefficiency  of  labor  in 
order  to  hasten  settlement,  without  surrendering  any  of 
their  rights  in  court  in  case  there  was  a  failure  to  settle. 
The  justification  for  this  proposed  legislation  from  the 
railroad  standpoint  lay  in  the  fact  that  these  expendi- 
tures were  imposed  upon  the  roads  under  the  war  powers 
of  the  President,  many  of  them  without  their  consent. 
To  offset  expenditures  for  additions  and  betterments  by 
payments  due  the  roads  for  compensation  virtually  classed 
these  expenditures  as  immediately  payable  out  of  current 
income.  But  no  executive  in  normal  times  would  have 
thought  of  incurring  obligations  of  this  size  to  be  reim- 
bursed from  current  income.  He  would  have  contracted 
long-time  obligations.  The  Government  was  taking  ad- 
vantage of  its  preferred  position  as  lessee  to  enforce  to 
the  limits  of  its  power  a  contract  which  was  imposed 
over  the  carriers'  protest,  and  which  in  its  effect  was  vio- 
lative  of  sound  principles  of  corporation  finance. 

In  reply,  it  might  be  noted  that  the  additions  and  better- 
ments that  were  most  seriously  objected  to  by  the  roads 
during  the  war  period  were  those  of  equipment,  which 
were  funded  up  to  100  per  cent  by  the  Government. 
Other  expenditures,  as  already  explained,  were  kept  down 
to  the  minimum,  and  none  at  all  were  contracted  for  after 
1918.  Judge  Lovett,  in  charge  of  capital  expenditures, 
himself  an  able  railroad  official,  slashed  ruthlessly  the 
estimated  capital  needs  which  the  railroads  had  sub- 
mitted in  response  to  his  request.  Safety  of  operation 
and  required  operating  capacity  were  almost  the  only 
recognized  grounds  for  expenditure.  Again  it  should  be 


FINANCIAL  RESULTS 

noted  that  while  the  Government  in  its  offset  policy  was 
demanding  the  payment  of  additions  and  betterments 
out  of  current  income,  it  was  not  requiring  this  payment 
at  the  expense  of  taxes,  interest,  sinking  funds,  or  divi- 
dends. It  was  a  payment  out  of  surplus  income. 

What  it  all  amounted  to  was  an  additional  loan  to  the 
railroads,  the  proceeds  of  which  should  be  turned  over  to 
them  in  cash.  There  was  no  legal  or  equitable  obligation 
on  the  part  of  the  Government  to  do  this.  It  was  a  mat- 
ter of  public  policy,  and  the  defense  for  it,  if  there  was 
any,  lay  outside  the  contract  relationship  of  Government 
and  carriers.  The  real  defense  for  the  plan  was  stated 
in  the  message  of  President  Harding  accompanying  the 
proposed  bill  as  follows: 

"Railway  solvency  and  efficiency  are  essential  to  our 
healthful  industrial,  commercial,  and  agricultural  life. 
Everything  hinges  on  transportation. 

"After  necessary  and  drastic  curtailments,  after  har- 
rowing straits  in  meeting  their  financial  difficulties,  the 
railways  need  only  this  financial  aid  which  the  fulfilment 
of  our  obligations  will  bestow  to  inaugurate  their  far- 
reaching  revival.  Its  effects  will  be  felt  in  varied  indus- 
tries, and  will  banish  to  a  large  degree  the  depression 
which,  though  inevitable  in  war's  aftermath,  we  are  all  so 
anxious  to  see  ended." 

To  release  frozen  credits,  to  start  moving  the  wheels 
of  industry,  these  were  the  real  arguments  for  the  bill. 
It  was  an  emergency  situation  to  be  handled  by  emer- 
gency methods.1 

For  the  purpose  still  further  of  "enabling  carriers  .  .  . 
properly  to  serve  the  public  during  the  transition  period," 

1  The  proponents  of  the  bill  could  not  secure  immediate  action,  and 
the  gradual  improvement  in  the  investment  market  resulting  in  the  sale 
by  the  Government  of  railroad  securities  held  by  it,  led  to  the  shelving 
of  the  measure. 


206  RAILROADS  AND  GOVERNMENT 

there  was  appropriated  $300,000,000  as  a  revolving  fund 
out  of  which  the  Government  might  make  loans  to  the 
carriers.  These  loans  were  to  be  contracted  within  two 
years  after  the  termination  of  federal  control,  and  the 
application  to  the  Commission  was  to  be  accompanied 
by  evidence  that  the  funds  were  necessary  to  enable  the 
carrier  properly  to  meet  the  public  need  for  transporta- 
tion, and  that  the  carrier  was  able  to  repay  the  loan. 
Loans  at  6  per  cent  not  to  exceed  five  years  in  duration 
could  be  certified  by  the  Commission  to  the  Treasury, 
and  the  advice  and  assistance  of  the  Federal  Reserve 
Board  might  be  invoked. 

After  consultation  with  interested  organizations,  the 
Commission  tentatively  allotted  the  loan  fund  to  certain 
specific  purposes,  the  purchase  of  freight-cars  and  loco- 
motives, additions  and  betterments  to  promote  freight- 
train  movement,  the  meeting  of  maturing  indebtedness, 
the  needs  of  short-line  railroads,  and  the  settlement  of 
claims  against  the  United  States  arising  out  of  federal 
control.  Up  to  August  20,  1921,  loans  amounting  to 
$226,000,000  had  been  made  from  this  fund. 

While  no  exact  figure  can  be  given  indicating  the  finan- 
cial outcome  of  federal  control,  it  is  evident  from  this 
brief  review  that  the  out-of-pocket  expense  to  the  Gov- 
ernment, the  war  cost,  in  the  operation  of  the  railroads, 
including  the  guarantee  period,  will  amount  to  not  less 
than  $1,850,000,000,  and  this  without  the  recognition  of 
claims  for  undermaintenance.  In  addition,  the  Govern- 
ment's investment  in  railroad  securities  may  reach  $950,- 
000,000,  which  is  in  the  form  of  obligations  maturing  at 
different  times  during  the  next  decade  and  a  half. 

Summary  of  Federal  Operation 

Inasmuch  as  each  phase  of  federal  operation  has  been 
examined  and  adjudged,  it  becomes  unnecessary  to  esti- 


FINANCIAL  RESULTS  207 

mate  at  length  the  period  as  a  whole.  It  divides  itself 
naturally  into  two  parts,  the  war  period  of  eleven  months, 
ending  with  the  armistice,  and  the  interim  period  from  the 
end  of  1918  until  the  roads  were  turned  back  on  March 
i,  1920.  So  far  as  the  first  period  is  concerned,  there  is 
almost  a  universal  feeling  that  the  undertaking  was  es- 
sential, and  that  while  mistakes  may  have  been  made 
in  operating  policies,  these  mistakes  are  more  readily 
discernible  now  than  they  could  have  been  at  the  time. 
The  causes  detailed  elsewhere  that  led  to  taking  posses- 
sion were  a  sufficient  justification.  Every  one  worked 
with  loyalty  and  enthusiasm,  from  the  highest  executive 
to  the  humblest  employee.  On  the  whole,  the  results  were 
gratifying  and  the  year  must  be  regarded  as  a  success. 
Problems  that  loomed  up  huge  and  insoluble  in  Decem- 
ber, 1917,  particularly  the  labor  problem  and  the  prob- 
lem of  finance,  were  both  handled  in  such  a  way  as  not 
only  to  prevent  a  stalling  of  the  transportation  machine, 
but  to  accelerate  its  efficient  working  as  a  part  of  the  Atf^ 
war  organization.  The  financial  deficit  of  $200,000,000 
was  wholly  due  to  the  fact  that  wage  increases  were  in 
effect  from  January  i,  while  rate  increases  took  effect 
not  much  before  July  i,  and  this  deficit  was  a  justifiable 
charge  against  war  account. 

The  second  year  is  more  difficult  to  estimate.  At  the 
beginning  there  was  a  difference  in  point  of  view  between 
the  Railroad  Administration  and  the  railroads  as  to  when 
federal  control  should  cease.  It  became  clear  before  many 
months,  however,  that  the  public  was  not  favorable  to  a 
further  continuance  of  federal  operation,  and  that  the 
roads  would  go  back  as  soon  as  Congress  could  arrange 
the  procedure.  In  fact,  in  his  message  to  Congress  cabled 
from  Paris  in  May,  1919,  the  President  had  announced 
that  the  railroads  would  be  handed  over  to  their  owners 
at  the  end  of  the  calendar  year.  Therefore,  the  Railroad 
Administration  in  1919  was  engaged  in  the  thankless 


208  RAILROADS  AND  GOVERNMENT 

task  of  holding  the  properties  together  until  the  day  of 
official  dissolution.  No  long-time  plans  could  be  initiated. 
It  was  a  day-to-day  administration  settling  only  such 
problems  as  were  absolutely  necessary  to  keep  the  plant 
in  operation.  This  situation  was  aggravated  by  the 
failure  of  Congress  to  pass  the  necessary  appropriations, 
and  by  the  steel  and  coal  strikes  in  the  fall  of  1919.  It 
was  satisfactory  neither  to  the  public,  the  railroads,  nor 
the  Railroad  Administration.  It  was  a  case  of  waiting 
upon  the  will  and  wisdom  of  Congress. 

Whether  federal  operation  on  the  whole  was  more 
costly  than  private  operation  would  have  been  is  an  idle 
question,  because  private  operation  would  have  been  an 
impossibility.  No  thorough  and  satisfactory  co-operation 
on  a  voluntary  basis  could  have  been  effected  under  exist- 
ing law,  and  it  is  not  clear  that  railroads  would  have  co- 
operated successfully,  even  if  they  could.  Whether  or  not 
federal  operation  was  wasteful  and  unnecessarily  costly 
rests  largely  upon  one's  conclusions  as  to  the  Adminis- 
tration's labor  policy.  In  matters  of  operation,  there 
were  many  savings  effected  through  co-operation,  some  of 
which  have  been  retained  under  private  management.  On 
the  financial  side,  the  Government's  aid  was  indispensable 
and  may  perhaps  have  saved  the  roads  from  bankruptcy. 
Capital  could  have  been  secured  in  the  market  by  the  in- 
dividual roads  only  at  prohibitive  prices,  if  at  all.  The 
Government  provided  at  reasonable  rates  the  funds  needed 
for  capital  investment  and  bridged  the  gap  between  rising 
costs  and  revenues.  With  the  popular  feeling  against 
price  increases  affecting  their  ability  to  raise  their  rates, 
with  the  irresistible  demands  for  wage  increases,  and  the 
constantly  rising  prices  of  materials  and  supplies,  most 
of  the  railroads  would  have  escaped  bankruptcy,  if  at  all, 
only  by  the  most  narrow  margin.  It  is  doubtful  whether 
any  but  the  most  substantial  of  the  carriers,  those  with 
large  accumulated  surpluses,  and  with  outside  sources  of 


FINANCIAL  RESULTS  209 

income  not  subject  to  federal  confiscation,  could  have 
weathered  the  storm  at  all. 

For  the  labor  policy  the  Government  was  responsible. 
It  established  the  eight-hour  day  with  time  and  a  half  for 
overtime,  it  drew  up  the  national  agreements,  it  accel- 
erated the  development  of  unionism.  It  broke  down  local 
discipline  and  gave  the  individual  employee  a  national 
outlook  and  a  sense  of  national  brotherhood.  It  is  too 
soon  to  judge  what  the  ultimate  outcome  will  be,  and 
whether  it  will  work  to  the  benefit  of  all  concerned.  Cer- 
tainly, for  the  time  being,  this  policy  increased  seriously 
the  difficulties  of  the  railroads  in  restoring  their  indi- 
vidual systems  to  efficient  working  condition.  And  it 
accounts  to  a  large  degree  for  the  deficit  financiering  of 
the  Railroad  Administration, — this  combined  with  the  in- 
disposition to  increase  rates  to  meet  increased  expenses, 
a  policy  already  sufficiently  discussed.  But  with  all  the 
indictments  against  the  Administration  in  mind,  one  could 
not  in  the  transition  year  following  the  war  have  looked 
with  complacency  upon  a  regime  of  private  operation, 
in  which  railroads  would  have  been  compelled  to  grant 
constant  increases  in  wages,  would  have  been  obliged 
to  seek  additions  to  capital  in  the  open  market  at  con- 
stantly increased  prices,  and  would  have  appeared  be- 
fore the  Commission  as  suppliants  for  corresponding  in- 
creases in  rates  to  meet  these  increased  costs.  The  effect 
upon  prices  with  its  tendency  to  multiply  the  increase  in 
the  price  charged  would  have  been  deplorable.  And  it 
must  also  be  remembered  that  increases  in  rates  do  not 
bring  immediate  response  in  revenues,  and  in  some  in- 
stances bring  no  response  at  all.  The  more  we  study 
the  situation,  the  more  probable  it  appears  that  the  rail- 
roads, if  thrown  upon  their  own  resources  immediately 
after  the  armistice,  would  have  failed  to  make  a  record 
materially  better  than  that  of  the  federal  administra- 
tion. 


210  RAILROADS  AND   GOVERNMENT 

The  results  of  federal  control  are  summarized  as  fol- 
lows by  Director- General  Hines  in  his  final  report: 

"It  made  practicable  a  war  transportation  service  that 
could  not  have  been  otherwise  obtained;  its  unification 
practices  have  increased  the  utilization  of  the  inadequate 
supply  of  equipment  so  that  an  exceptionally  large  trans- 
portation service  has  been  performed  in  the  busy  periods 
of  1919  with  a  minimum  of  congestion;  it  met  the  emer- 
gency of  the  unprecedented  coal  strike  in  a  way  which 
private  control  could  not  have  done  and  absorbed  a  heavy 
financial  loss  on  that  account  which  would  have  proved 
highly  disturbing  to  private  control;  it  provided  more 
additions  and  betterments  and  equipment  than  private 
control  could  have  provided  during  the  difficult  financial 
period  of  1918  and  1919;  it  dealt  fairly  with  labor,  and 
gave  it  the  benefit  of  improved  and  stabilized  working 
conditions  which  were  clearly  right;  it  not  only  did  not 
cost  more  than  private  control  would  have  cost  during 
the  same  period,  but  cost  considerably  less  on  account 
of  the  economies  growing  out  of  unifications,  and  the 
total  burden  put  upon  the  public  (through  rates  and 
taxes)  on  account  of  railroad  costs  was  substantially 
less  than  would  have  been  necessary  if  the  railroads  had 
remained  in  private  control  and  rates  had  been  raised 
enough  to  preserve  their  credit;  it  protected  the  invest- 
ment in  railroad  properties,  whereas  without  federal  con- 
trol those  investments  would  have  been  endangered;  and 
it  turns  the  railroads  back  to  private  control  functioning 
effectively,  with  a  record  of  exceptional  performance  in 
an  exceptionally  difficult  winter,  despite  the  disruption 
caused  by  the  coal  strike,  and  in  condition  to  function 
still  more  effectively  with  the  normal  improvement  to 
be  expected  in  the  weather  and  in  other  conditions." 


THE  RETURN  TO  PRIVATE  OPERATION 


CHAPTER  XV 

THE  PROBLEM  OF  RECONSTRUCTION  AND  THE  ACT  OF  IQ2O 

ON  December  24,  1919,  the  President  of  the  United 
States  issued  his  proclamation  announcing  the  return 
of  the  roads  to  their  owners  on  March  i,  1920.  Thus 
was  the  immediate  future  of  the  railroads  definitely  set- 
tled, and  Congress  warned  to  speed  up  in  shaping  legis- 
lation under  which  the  roads  were  to  operate  when  the 
Government  should  withdraw  its  protection.  It  was 
evident  that  the  problem  of  the  immediate  future  could 
not  be  solved  by  a  mere  withdrawal  of  the  Government 
from  the  scene  of  operations.  One  glance  at  the  rail- 
road income  account  would  have  disposed  of  any  such 
supposition.  Some  provision  must  be  made  by  which 
earnings  should  cover  expenses  if  financial  disaster  was 
to  be  warded  off,  and,  more  than  this,  the  confidence  of 
the  financial  community  must  be  restored  if  credit  was 
to  be  available  for  all  the  pressing  capital  requirements 
that  had  perforce  been  laid  one  side  during  the  war  and 
its  aftermath.  On  the  operating  side,  there  was  much 
to  be  done  to  transform  a  nationally  conceived  organiza- 
tion into  efficient  individual  operating  units.  Labor 
organization  and  morale  had  to  be  reconstructed.  Equip- 
ment scattered  to  the  far  ends  of  the  country  was  to  be 
returned  to  its  owners.  If  the  statements  of  officials  are 
to  be  accepted,  there  was  an  enormous  amount  of  main- 
tenance work  to  be  done,  both  on  road  and  equipment, 
before  facilities  could  be  restored  to  pre-war  standards. 
These  difficulties  of  the  transition  stage  were  responsible 
for  the  granting  of  a  "guarantee  period"  to  be  discussed 
presently.  But  the  legislative  opportunity  was  used  to 
the  uttermost  for  the  introduction  of  many  innovations 

213 


214  RAILROADS   AND   GOVERNMENT 

long  advocated.  The  mental  upheaval  following  the 
war  made  it  easy,  apparently,  to  put  through  projects 
that  would  have  seemed  formidable  undertakings  in  nor- 
mal times.  Moreover,  the  popular  reaction  against  Gov- 
ernment operation  developed  into  an  almost  unanimous 
approval,  from  public  and  corporations  alike,  of  much 
more  extensive  and  effective  Government  regulation. 
So  that  the  legislation  passed  on  the  eve  of  the  return 
of  the  railroads  to  their  owners  provided  not  alone  the 
means  necessary  to  make  this  transition  safe  but  in- 
cluded an  elaborate  amendment  of  the  Interstate  Com- 
merce Act. 

This  legislation  was  the  result  of  extended  and  pro- 
found investigation  by  those  leaders  in  Congress  who 
were  directly  concerned  with  railroad  affairs.  President 
Wilson,  in  connection  with  his  preparedness  message  to 
Congress  in  December,  1915,  had  recommended  the  crea- 
tion of  a  commission  to  inquire  into  the  condition  of  the 
railroads.  A  Joint  Committee  of  House  and  Senate  was 
appointed  the  following  July  under  instructions  which 
revealed  the  problems  that  the  public  was  seeking  to 
solve.  It  was  ordered  to  investigate  Government  owner- 
ship, incorporation  of  carriers,  proposed  changes  in  the 
Interstate  Commerce  Act  and  in  the  organization  of  the 
Commission,  and  the  controversy,  rendered  acute  by 
Supreme  Court  decision,  concerning  the  delimitation  of 
authority  of  federal  and  state  commissions.  This  com- 
mittee, the  life  of  which  was  twice  extended  and  whose 
activities,  continuing  at  intervals  through  1916  and  1917, 
were  ended  only  by  the  initiation  of  federal  operation, 
accumulated  a  mass  of  information,1  and  through  its 
hearings  placed  the  leading  experts  on  record  concern- 
ing the  problems  at  issue.  The  signing  of  the  armis- 
tice in  November,  1918,  brought  again  sharply  to  the 

1  Hearings  before  Joint  Committee  on  Interstate  and  Foreign  Com- 
merce, 64th  Cong.,  1st  Sess.,  Nov.  20,  1916,  to  Dec.  19,  1917. 


RECONSTRUCTION  AND  THE  ACT  OF  1920      215 

front  the  future  of  the  railroads.  In  his  annual  mes- 
sage in  December  the  President  frankly  admitted  that 
he  had  no  solution,  and  that  the  only  conclusion  he  had 
reached  was  that  it  would  be  a  disservice  to  the  country 
and  to  the  railroad  owners  to  return  to  the  old  conditions 
unmodified.  Some  new  element  of  policy  was  necessary 
to  remove  restraint  and  insure  development  alike  of  all 
forms  of  transportation, — railroads,  waterways,  and  high- 
ways. While  negative  in  tone,  the  message  was  in  essence 
a  plea  for  the  development  of  co-operation  and  a  rejection 
of  the  idea  of  permanent  nationalization.  Upon  the  heels 
of  this  message  came  the  annual  report  to  Congress  of  the 
Interstate  Commerce  Commission.  This  body  was  like- 
wise dominated  by  the  desire  for  greater  co-operation  of 
all  agencies  of  transportation  and  a  closer  working  inter- 
relationship of  existing  railroad  lines.  It  declared  that 
whatever  policy  of  management  might  be  adopted,  there 
should  be  provision  for  prompt  unification  of  all  lines  in 
time  of  emergency,  and  in  normal  times  a  reasonable 
merger  of  lines  and  facilities  sufficient  to  promote  the 
public  interest.  It  urged  a  limitation  of  railroad  con- 
struction to  what  was  needed  by  the  public,  and  the 
development  of  water  transportation  and  its  co-ordina- 
tion with  rail.  On  the  general  issue  of  public  as  against 
private  ownership  and  operation,  the  Commission  ex- 
pressed no  opinion,  but  confined  itself  to  stating  the  leg- 
islative demands  that  would  arise  under  either  plan  and 
the  points  at  which  the  public  interest  must  be  ad- 
equately safeguarded. 

Shortly  thereafter  Director- General  McAdoo  submit- 
ted a  formal  statement  to  the  Senate  Finance  Commit- 
tee, urging  an  extension  of  Government  control  from  the 
statutory  period  of  twenty-one  months  after  the  sign- 
ing of  the  peace  treaty  to  January,  1924,  or  a  period  of 
five  years.  A  consideration  of  this  suggestion  by  com- 
mittees of  Congress  opened  up  the  entire  problem  of  the 


2l6  RAILROADS  AND  GOVERNMENT 

railroads'  future  and  gave  opportunity  for  the  presen- 
tation of  the  many  plans  out  of  which  the  Transportation 
Act  of  1920  was  shaped. 

It  would  be  impracticable,  even  though  it  were  in- 
forming, to  analyze  all  the  varied  proposals,  advocated 
with  a  skill  and  an  earnestness  and  backed  by  a  popular 
interest  such  as  has  never  before  been  experienced  in 
this  country  in  connection  with  railroad  legislation. 
There  were  the  official  proposals  from  the  Government, 
including  those  of  the  Directors- General  and  the  Inter- 
state Commerce  Commission.  There  was  the  plan  of 
the  railroad  executive  managements  presented  by  the 
Association  of  Railway  Executives.  The  shipping  and 
business  interests  were  most  adequately  represented  in 
the  proposals  of  the  National  Transportation  Conference 
organized  by  the  United  States  Chamber  of  Commerce. 
Other  organizations  of  "citizens"  constituted  themselves 
into  leagues  for  the  purpose  of  giving  weight  to  ideas 
which  their  founders  desired  to  have  incorporated  into 
law.  The  counsel  of  the  railroad  brotherhoods  proposed 
the  "Plumb  Plan."  Individuals  in  considerable  numbers 
offered  suggestions  which  ran  all  the  way  from  modifica- 
tions of  those  previously  suggested  to  complete  schemes 
of  their  own,  and  all  of  these  plans  were  elaborated  in 
hearings  before  the  appropriate  committees  of  Congress. 
The  legislators  who  were  to  be  responsible  for  the  final 
bill  were  literally  overwhelmed  with  specific  advice,  crit- 
icisms, and  suggestions  upon  every  possible  phase  of  this 
complicated  question. 

It  will  be  helpful  to  present  briefly  a  few  of  the  more 
significant  phases  of  this  extraordinary  discussion.  First 
in  order  came  the  proposal  of  Director- General  McAdoo, 
ably  supported  later  by  his  successor,  Director- General 
Hines.  It  was  a  plea  for  a  continuation  of  existing  con- 
trol for  another  five  years.  It  would  take  the  railroad 
question  out  of  politics  for  a  reasonable  period  and  be- 


RECONSTRUCTION  AND  THE  ACT   OF   1 920  217 

fore  it  should  become  involved  in  the  approaching  cam- 
paign. It  would  give  composure  to  railroad  officers  and 
employees  who  were  now  in  a  state  of  restless  uncertainty. 
It  would  permit  the  planning  and  execution  of  a  com- 
prehensive programme  of  railroad  betterments  that  would 
immensely  increase  the  efficiency  of  the  machine.  It 
would  give  the  railroads  the  benefit  of  the  credit  of  the 
United  States,  so  that  financing  could  be  successfully 
accomplished.  Moreover,  and  this  was  the  real  reason 
for  the  proposal,  it  would  give  an  opportunity  to  test 
under  normal  conditions  the  value  of  unified  control,  and 
thus  put  the  country  into  a  position  to  find  intelligently 
a  permanent  solution  for  the  railroad  problem.  For  those 
who  believe  in  a  far  greater  degree  of  co-operation  be- 
tween railroads  than  now  prevails,  this  proposal  had 
much  to  commend  it.  A  five-year  period  would  have 
offered  a  much  needed  opportunity  to  force  upon  the 
individual  railroads  many  projects  for  co-operative  opera- 
tion, the  accomplishment  of  which  under  present  condi- 
tions will  long  be  prevented  by  the  jealousy  or  indiffer- 
ence or  selfishness  or  conservatism  of  individual  execu- 
tives. But  Mr.  McAdoo's  proposal  failed  to  take  account 
of  popular  feeling.  An  impatience  to  get  back  to  a  peace 
basis,  an  unwillingness  to  submit  longer  to  a  control  that 
even  under  war  conditions  was  in  many  respects  arbitrary 
and  autocratic,  robbed  this  project  of  all  popular  support. 
The  public  would  have  none  of  it.  In  spite  of  its  attrac- 
tive possibilities  in  developing  the  principle  of  co-opera- 
tion, the  plan  contained  features  so  objectionable  as  to 
condemn  it  wholly,  unless  one  were  an  advocate  of  perma- 
nent nationalization.  A  continuance  of  the  existing  con- 
tracts with  the  railroads  meant  a  continuance  of  the 
Government  guarantee,  a  fixed  amount  to  each  road, 
without  any  regard  to  the  efficiency  of  its  operation.  The 
guarantee  had  already  proved  demoralizing  under  war  con- 
ditions. It  would  have  been  destructive  of  all  individual 


2l8  RAILROADS  AND  GOVERNMENT 

efficiency  by  the  end  of  a  five-year  period.  Then  there  was 
the  rapidly  declining  morale  of  the  labor  organization  on 
the  individual  road,  the  destruction  of  individuality  by 
such  measures,  for  example,  as  the  scattering  of  cars  re- 
gardless of  ownership  or  adaptability  to  special  situations, 
the  constant  emphasis  upon  the  superior  claims  of  na- 
tional interest  as  against  the  local  needs  of  the  carrier. 
All  this  would  have  resulted  in  a  scrambling  of  the  systems 
from  which  the  individual  railroad  would  probably  have 
never  emerged.  Moreover,  the  financial  obligations  of 
the  roads  to  the  Government,  already  large  at  the  end  of 
federal  control,  would  at  the  end  of  another  half-decade 
have  become  a  burden  that  they  could  not  have  indi- 
vidually assumed,  and  the  obvious  alternative  would  have 
been  nationalization.  Whether  so  intended  or  not,  the 
proposal  was  too  definite  a  bid  for  Government  owner- 
ship to  meet  with  any  popular  indorsement. 

The  proposals  of  the  Interstate  Commerce  Commission 
were  merely  an  extension  of  the  suggestions  contained  in 
its  annual  report  for  1918  already  referred  to,  except  in 
one  respect.  It  had  reached  the  conviction  that  with 
.  the  adoption  of  appropriate  safeguards  for  regulation 
.Vv  "it  would  not  be  wise  or  best  at  this  time  to  assume 
Government  ownership  or  operation  of  the  railways  of 
the  country."  Accordingly,  its  specific  recommendations 
were  in  accord  with  this  view  and  were  largely  in  the 
nature  of  amendments  to  existing  legislation  growing 
out  of  its  experience  with  the  problem.  They  included 
the  abandonment  of  limitations  upon  pooling  and  con- 
solidation, the  power  to  prescribe  a  minimum  rate,  the 
emancipation  of  railroad  operation  from  financial  dicta- 
tion, the  regulation  of  the  issue  of  securities,  the  elimina- 
tion of  the  twilight  zone  of  jurisdiction  between  federal 
and  state  authority,  more  efficient  use  of  equipment  and 
more  liberal  use  of  terminals,  and  the  solution  of  the  prob- 
lem of  specialized  facilities  and  the  private  car. 


RECONSTRUCTION  AND  THE  ACT  OF  IQ2O      2 19 

The  Association  of  Railway  Executives  presented  the 
plan  which  was  supported  by  virtually  all  railroad 
managements,  the  leading  features  of  which  were  federal 
incorporation  of  all  interstate  carriers,  voluntary  con- 
solidation of  existing  lines,  joint  use  of  equipment  and 
terminals  when  the  public  interest  required,  regulation 
of  security  issues  by  the  Interstate  Commerce  Commis- 
sion, and  exclusive  regulation  of  all  rates,  state  and  inter- 
state, by  the  same  body.  In  connection  therewith,  the 
association  proposed  a  statutory  rule  of  rate  making, 
which  was  to  declare  that  the  level  of  rates  should  be 
such  as  would  provide  a  revenue  sufficient  to  cover  ex- 
penses and  a  fair  return  on  the  value  of  property,  and 
to  maintain  the  credit  of  the  roads  at  a  level  that  would 
attract  new  and  necessary  capital.  The  plan  also  con- 
templated the  creation  of  a  Federal  Transportation  Board 
which  should  take  from  the  Interstate  Commerce  Com- 
mission all  of  its  present  duties  except  those  of  rate  regu- 
lation, accounting,  and  valuation.  It  was  also  to  have 
the  duty  of  certifying  to  the  Commission  the  amount  of 
revenue  needed  by  the  roads  to  meet  the  requirements 
of  the  statutory  rule. 

Comprehensive  plans  were  submitted  by  the  National 
Association  of  Owners  of  Railroad  Securities  and  by  the 
United  States  Chamber  of  Commerce.  From  these  two 
came  the  rate  section  substantially  in  the  form  in  which 
it  was  finally  adopted.  The  Security  Owners'  Association 
played  an  influential,  a  unique,  and  an  altogether  unprec- 
edented role.  It  consisted  very  largely  of  bondholders 
in  the  form  of  insurance  and  trust  companies  and  sav- 
ings institutions,  which  felt  that  their  interests  were  not 
being  fully  considered  by  the  active  managements  of  the 
roads.  It  represented  a  new  departure  in  railroad  poli- 
tics, the  first  organized  attempt  of  railroad  creditors  on 
a  national  scale  to  participate  in  the  solution  of  the 
railroad  problem.  Moreover,  it  meant  a  somewhat  new 


220  RAILROADS  AND   GOVERNMENT 

conception  of  the  place  of  the  bondholder  in  railroad 
management.  The  issue  was  later  sharply  drawn  when 
in  the  most  critical  period  of  the  labor  controversy  in 
the  spring  of  1921  a  committee  of  this  association  in- 
vited the  brotherhood  leaders  to  confer  with  it  with 
reference  to  the  problem.  This  brought  a  protest  in 
the  form  of  a  letter  from  President  Smith  of  the  New 
York  Central  Railroad  to  President  Warfield  of  the 
National  Association  of  Owners  of  Railroad  Securities, 
in  which  Mr.  Smith  took  the  position  that  the  board 
of  directors  of  the  New  York  Central  and  the  officers 
appointed  by  it  represented  the  New  York  Central  and 
its  stockholders  in  all  matters  of  management.  He  de- 
nied the  right  or  propriety  of  intervention  by  bondholders 
in  the  labor  situation.  Reply  was  made  by  Mr.  Haley 
Fiske,  president  of  the  Metropolitan  Life  Insurance  Com- 
pany, who  was  one  of  the  conferees.  Mr.  Fiske  called 
attention  to  the  fact  that  his  company  had  a  financial 
interest  in  the  New  York  Central  through  bonds  and 
otherwise  to  the  extent  of  $32,000,000,  and  that  this  in- 
terest was  a  vital  one.  As  one  of  the  "owners  of  the  prop- 
erty," the  Metropolitan  Life  Insurance  Company  was 
interested  in  promoting  co-operation  between  the  rail- 
road administrations  and  their  operatives  and  in  saving 
its  interests  from  the  disaster  which  was  felt  might  follow 
from  the  situation  then  prevailing.  This  incident  has 
been  related  for  the  purpose  of  setting  forth  a  significant 
issue  which  is  sure  to  arise  again.  Is  the  old  legalistic 
conception  of  the  corporation  still  dominant  in  railroad 
affairs?  Is  the  bondholder  a  creditor  pure  and  simple, 
whose  only  proper  concern  is  in  the  safety  of  his  prin- 
cipal and  the  regular  payment  of  his  interest?  Two  fac- 
tors in  the  situation  would  seem  to  suggest  a  negative 
answer.  In  the  first  place,  capital  for  permanent  in- 
vestment is  secured  quite  as  extensively  from  the  sale 
of  bonds  as  from  the  sale  of  stock,  and  in  recent  years 


RECONSTRUCTION  AND   THE   ACT   OF    IQ2O  221 

the  former  method  has  been  far  more  generally  resorted 
to.  It  is  not  the  intention  of  railroads  to  any  consider- 
able degree  to  pay  off  these  bonds  at  maturity  other  than 
through  a  refunding  process.  The  bondholder  is  a  perma- 
nent investor  in  the  business.  Furthermore,  his  security, 
although  nominally  found  in  many  instances  in  the  prop- 
erty of  the  corporation,  is  actually  in  its  earning  power.  It 
is  impracticable  in  most  instances  under  foreclosure  pro- 
ceedings to  dismember  the  property  of  a  railroad  corpora- 
tion for  the  satisfaction  of  the  creditors.  What  the  bond- 
holders desire  is  prompt  reorganization,  with  a  restoration 
of  earnings  sufficient  to  pay  their  interest.  If  then  the 
bondholder  is  a  permanent  investor  and  looks  to  the  earn- 
ings of  the  corporation  for  his  security,  he  has  a  vital 
personal  interest  in  management  and  is  entitled  to  express 
it  on  all  proper  occasions.  To  be  sure,  if  he  uses  his  in- 
fluence to  promote  the  exclusive  interests  of  the  bond- 
holders without  regard  to  the  "residuary  legatees,"  the 
stockholders,  he  is  acting  quite  as  unjustifiably  as  is  rail- 
road management  when  it  warns  creditors  to  keep  hands 
off,  but  no  such  attitude  can  be  attributed  to  this  asso- 
ciation. The  work  of  the  railroad  bondholders  during 
the  discussion  of  new  railroad  legislation  was  constructive, 
and  much  of  the  credit  for  the  outcome  must  be  accorded 
to  them. 

Throughout  all  the  various  plans,  with  the  exception 
of  the  "Plumb  Plan,"  to  be  separately  described,  there 
ran  a  fundamental  similarity  in  constructive  suggestions. 
Without  further  discussion  of  individual  proposals,  it  will 
suffice  to  summarize  the  suggestions  that,  with  variations 
in  matters  of  detail,  were  found  in  most  of  the  compre- 
hensive schemes. 

1.  An  almost  universal  opinion  in  favor  of  private 
ownership  and  operation  with  increased  powers  given  to 
the  regulating  authorities. 

2.  Consolidation   of   carriers   into   a   relatively   small 


222  RAILROADS   AND    GOVERNMENT 

number  of  systems  varying  from  thirty-five  to  a  single 
corporation.  In  some  plans  consolidation  was  compul- 
sory, in  others  voluntary,  but  they  all  sought  to  preserve 
competition  in  service,  and  they  all  provided  that  con- 
solidations were  to  be  created  with  the  permission  of  the 
Commission  and  to  be  under  its  control. 

3.  Consolidation  to  be  accomplished  through  federal 
incorporation,  and  in  some  proposals  through  the  creation 
of  holding  companies. 

4.  Supervision  of  the  issue  of  securities  by  the  Inter- 
state Commerce  Commission. 

5.  The  addition  to  the  duties  of  the  Commission  of  the 
responsibility  of  assuring  to  the  roads  adequate  revenue. 

6.  Suggestions  for  assuring  a  definite  return  to  the 
roads  ranging  from  a  guarantee  on  securities  or  property, 
to  a  mandate  prescribing  the  necessary  rates  to  insure  a 
definite  income. 

7.  A  shortening  of  the  period  allowed  the  Commission 
for  the  suspension  of  rates. 

8.  Provisions  for  adjustment  of  labor  disputes  ranging 
all  the  way  from  mere  conciliation  boards  to  compulsory 
arbitration. 

9.  Proposals  for  federal   agencies   to  carry   the   new 
powers  into  effect,  including  regional  boards,  and  an  en- 
larged and  strengthened  Interstate  Commerce  Commis- 
sion. 

In  view  of  the  fact  that  the  so-called  "Plumb  Plan" 
contained  proposals  quite  at  variance  with  all  other  sug- 
gestions made,  and  was  indorsed  and  is  still  supported, 
at  least  nominally,  by  the  organized  employees,  the 
scheme  will  be  set  forth  here  in  outline.  It  provided  for 
the  purchase  by  the  Government  of  the  railroad  properties. 
The  operating  lessee  of  the  roads  was  to  be  a  national 
corporation  without  capital,  the  direction  of  which  was  to 
be  in  the  hands  of  fifteen  men,  five  representing  the  public 
and  appointed  by  the  President,  five  chosen  by  the  classi- 


RECONSTRUCTION  AND   THE  ACT  OF   1920  223 

fied  employees,  and  five  by  the  operating  officials.  Sur- 
plus after  payment  of  expenses  and  fixed  charges  was  to  ,  v/ 
be  divided  equally  between  the  Government  and  the  em- 
ployees, the  operating  officials  receiving  twice  the  divi- 
dend granted  to  the  classified  workers.  When  the  Gov- 
ernment's share  in  any  given  year  was  more  than  5  per 
cent  of  the  gross  operating  revenue,  the  Interstate  Com- 
merce Commission  was  obliged  to  reduce  the  rates  suffi- 
ciently to  absorb  this  surplus.  A  sinking  fund  was  to  be  set 
aside  from  gross  operating  revenue  to  retire  the  Govern- 
ment securities  with  which  the  roads  were  to  be  purchased. 
Extensions  were  to  be  financed  by  the  Government,  al- 
though, so  far  as  possible,  the  burden  was  to  be  shifted  to 
the  communities  benefited.  The  Commission  retained  its 
rate-fixing  powers.  Labor  adjustment  was  in  the  hands  of 
bipartisan  boards  composed  equally  of  officials  and  em- 
ployees, with  appeal  to  the  directors  of  the  corporation. 

It  is  not  necessary  to  go  into  any  elaborate  discussion 
of  the  merits  of  this  plan.  It  did  not  meet  with  the  public 
support  that  was  evidently  expected.  It  produced  almost 
no  influence  upon  Congress.  It  was  backed  by  organized 
labor,  and  officially  the  plan  still  has  labor's  indorsement 
in  the  campaign  being  conducted  by  the  Plumb  Plan 
League.  The  serious  plight  of  the  railroads  makes  fertile 
soil  for  the  sowing  of  Government-ownership  propaganda. 
Thus  far  the  public  has  not  shown  any  signs  of  .enthu- 
siastic indorsement,  and  in  fact  there  are  evidences  that 
the  leaders  of  railroad  labor  are  at  times,  in  their  negotia- 
tions with  their  employers,  finding  their  obligations  to 
the  Plumb  Plan  somewhat  irksome.  It  may  yet  prove 
a  millstone  about  their  necks. 

The  plan  has  the  superficially  attractive  feature  that 
it  eliminates  all  private  gain  from  railroad  operation, 
monopolizes  the  roads  in  the  public  interest  through  the 
employment  of  Government  funds,  and  gives  the  public 
a  share  in  the  prosperity  of  the  industry  through  a  re- 


224  RAILROADS  AND   GOVERNMENT 

duction  in  rates  corresponding  to  the  increase  in  net 
revenue.  But  its  success  would  depend  upon  the  develop- 
ment of  a  sense  of  public  responsibility  and  a  degree  of  ef- 
ficiency among  railroad  employees  that  experience  hardly 
justifies  one  in  assuming.  Without  such  efficiency,  with- 
out cordial  co-operation  between  official  and  classified 
employees,  without  the  utilization  of  the  highest  degree  of 
executive  talent  and  managerial  capacity,  the  predicted 
results  would  not  appear  and  the  scheme  would  fail.  It 
should  be  noted  that  this  is  not  a  plan  for  state  social- 
ism. Mr.  Plumb  disbelieves  in  Government  operation 
in  a  democracy,  and  declares  that  it  is  sure  to  fail.  It  is 
rather  a  form  of  Guild  Socialism,  in  which  the  Govern- 
ment puts  its  property  into  the  hands  of  trustees  to  be 
operated  for  the  joint  benefit  of  the  public  and  of  those 
engaged  in  its  operation.  It  is  foolish  to  dismiss  a  scheme 
of  this  character  by  simply  denouncing  it  as  Sovietism, 
and  hence  anathema.  No  special  form  of  organization 
has  any  inherent  right  to  existence  in  a  democracy.  It 
is  a  question  of  expediency.  The  -public  wants  service 
under  the  most  favorable  circumstances.  Will  the  Plumb 
Plan,  all  things  considered,  work  to  the  greatest  public 
good?  So  far  as  any  one  can  judge,  the  public  at  pres- 
ent thinks  not,  and  a  careful  analysis  of  the  provisions 
and  their  probable  working  confirms  the  public  judg- 
ment. 

On  October  23,  1919,  the  Cummins  Bill  was  reported 
to  the  Senate,  where  it  passed  on  December  20.  The 
Esch  Bill  meanwhile  had  been  reported  to  the  House  on 
November  10  and  passed  on  November  17.  A  compari- 
son of  the  two  bills  revealed  divergencies  so  marked  in 
character  that  it  was  evident  that  the  new  Act  would  be 
a  conference  measure,  and  so  it  proved.  The  compro- 
mise measure,  action  upon  which  was  speeded  up  by  the 
President's  proclamation  announcing  the  return  of  the 
roads  on  March  i,  emerged  from  conference  on  February 


RECONSTRUCTION  AND  THE  ACT  OF  1 920      225 

18.  It  passed  the  House  on  February  21  and  the  Senate 
on  the  23d,  in  both  by  substantial  majorities.  President 
Wilson  affixed  his  signature  on  February  28,  and  on  the 
next  day  at  midnight  the  roads  reverted  to  their  owners 
under  the  instructions  of  the  presidential  proclamation 
of  the  previous  December.  To  the  examination  of  the 
more  significant  features  of  this  statute  attention  will 
now  be  directed. 

The  Guarantee  Period 

But  attention  must  first  be  called  to  the  "guarantee 
period,"  which  has  already  been  under  consideration  in 
connection  with  the  finances  of  the  war  period.  The 
termination  of  federal  control  at  12.01  A.  M.  March  i, 
1920,  carried  with  it  the  provision  that  the  President 
should  then  relinquish  possession  of  all  railroads,  and 
that  the  powers  relating  to  control  over  operation  and 
charges  should  cease.  Similarly  all  powers  relating  to 
the  purchase,  construction,  or  operation  of  waterways, 
and  the  purchase  of  securities  or  the  use  of  the  revolving 
fund,  were  to  expire,  except  as  they  were  exercised  to 
complete  existing  contracts.  All  waterway  facilities 
owned  by  the  Government  were  to  be  transferred  to  the 
Secretary  of  War,  who  was  to  assume  all  contracts  and 
to  continue  operation.  Settlement  of  all  questions  in- 
volved in  the  contract  with  the  railroads  was  to  proceed 
as  rapidly  as  possible,  and  funds  and  the  machinery  of 
settlement,  as  already  discussed,  were  provided  to  expe- 
dite the  process. 

It  was  enacted  that  no  rate  or  fare,  or  any  classifica- 
tion or  regulation  that  affected  the  rates  or  the  value  of 
the  service,  which  was  in  effect  when  federal  control 
ceased,  could  be  reduced  prior  to  September  i,  1920, 
without  express  approval  of  the  Interstate  Commerce 
Commission.  This  extended  for  another  half-year  the 
war  powers  of  the  federal  commission  over  intra-state 


226 


RAILROADS  AND   GOVERNMENT 


rates  and  practices.  But  Congress  went  further  than 
merely  to  protect  carriers  in  the  preservation  of  the  rate 
base.  It  set  up  a  "guarantee  period"  of  six  months  from 
March  i,  1920,  during  which  the  carriers  were  to  receive 
one-half  the  annual  compensation  guaranteed  them  by 
their  war  contracts  with  the  Government.  This  was 
granted  to  take  care  of  the  roads  until  they  should  be 
able  to  stand  alone.  Their  equipment  was  scattered, 
the  morale  of  their  organizations  impaired,  if  not  de- 
stroyed, the  physical  condition  of  property  and  equip- 
ment was  below  the  demands  of  service.  They  needed 
increased  rates  to  cover  the  deficits  which  the  Govern- 
ment had  been  caring  for  out  of  the  public  treasury.  Re- 
covery would  take  time,  and  to  have  thrown  them  immedi- 
ately upon  their  own  resources  would  have  resulted  in 
wide-spread  disaster.  In  general,  contract  conditions  un- 
der which  the  roads  had  been  operating  were  continued 
for  the  guarantee  period.  In  order  to  secure  the  benefits 
of  the  guarantee  it  was  necessary  that  each  carrier  should 
file  with  the  Commission  by  March  15  a  statement  accept- 
ing the  provisions  of  the  Act.  This  meant  essentially 
that  the  carrier  should  turn  over  to  the  Government 
all  income  in  excess  of  the  guarantee.  Thirty-nine  Class  I 
roads  declined  to  accept  this  contract,  preferring  to 
operate  independently  and  "take  a  sporting  chance" 
of  profit  or  loss. 


CHAPTER  XVI 

THE   PROBLEM   OF   RATES 

THAT  section  of  the  Act  which  Senator  Cummins  de- 
clared to  be  the  one  about  which  "the  bill  revolves'* 
prescribed  a  detailed  method  of  rate  making.  It  opened 
with  a  declaration  of  policy  addressed  to  the  Interstate 
Commerce  Commission.  It  declared  that  in  the  exer- 
cise of  its  rate-making  authority,  the  Commission  should 
prescribe  such  rates  as  would  give  a  fair  return  on  the 
aggregate  value  of  the  property  used  in  the  service  of 
transportation.  In  determining  the  net  operating  income 
that  would  constitute  this  fair  return  it  was  to  take  ac- 
count of  honesty,  efficiency,  and  economy  of  management, 
and  whether  reasonable  expenditures  had  been  incurred 
for  maintenance.  It  was  from  time  to  time  to  determine 
what  percentage  upon  property  value  would  constitute  a 
fair  return,  such  percentage  to  be  uniform  for  the  various 
rate  groups  into  which  the  country  was  to  be  divided.  In 
reaching  its  conclusion  as  to  the  proper  percentage  to 
apply,  it  had  to  give  due  consideration  to  the  transporta- 
tion needs  of  the  country  and  the  probable  demand  for 
increased  facilities.  For  the  first  two  years,  until  March 
i,  1922,  the  rate  of  return  was  prescribed  by  Congress  and 
was  to  be  5^  per  cent  on  the  value,  to  which  the  Com- 
mission might,  in  its  discretion,  add  %  of  i  per  cent  to 
make  provision  for  capital  expenditures  in  the  form  of 
improvements  or  betterments.  The  value  of  the  prop- 
erty of  the  carriers  was  to  be  determined  by  the  Commis- 
sion, which  was  authorized  to  make  use  of  the  results 
reached  by  its  Bureau  of  Valuation  so  far  as  they  were 
available.  The  Commission  shall,  said  the  statute,  "give 
due  consideration  to  all  the  elements  of  value  recognized 

227 


228  RAILROADS  AND   GOVERNMENT 

by  the  law  of  the  land  for  rate-making  purposes,  and 
shall  give  to  the  property  investment  account  of  the 
carriers  only  that  consideration  which  under  such  law  it 
is  entitled  to  in  establishing  values  for  rate-making  pur- 
poses." It  is  to  be  hoped  that  the  Commission  knows 
what  this  means. 

Then  follows  the  feature  that  is  new  to  American 
legislation.  Congress  announced  that  as  it  was  impossible 
to  establish  uniform  rates  upon  competitive  traffic  that 
would  adequately  sustain  all  the  carriers  engaged  in  such 
traffic,  and  which  were  indispensable  to  the  communities 
they  serve,  without  at  the  same  time  granting  some  of 
the  carriers  an  income  unreasonably  in  excess  of  a  fair 
return  upon  the  value  of  their  property,  any  carrier  re- 
ceiving such  excessive  return  held  the  excess  as  a  trustee 
and  must  dispose  of  it  as  Congress  should  direct.  The 
method  of  disposal  was  this.  If  a  carrier  enjoyed  net  rail- 
way operating  income  in  excess  of  6  per  cent  of  its  prop- 
erty value,  one-half  of  such  excess  was  to  be  paid  into  a 
reserve  fund  maintained  by  the  carrier  until  this  reserve 
reached  5  per  cent  of  the  value  of  its  property,  and  there- 
after it  might  use  its  share  of  the  excess  earnings  for  any 
lawful  purpose.  The  reserve  fund  might  be  drawn  upon 
for  dividends,  interest,  or  rentals  in  any  year  in  which  the 
operating  income  did  not  amount  to  6  per  cent.  The 
other  half  of  the  excess  operating  income  above  6  per 
cent  was  to  be  paid  to  the  Commission,  and  was  to  go 
into  a  railroad  contingent  fund  which  was  to  be  adminis- 
tered as  a  revolving  fund  under  its  direction.  Therefrom 
loans  might  be  made  to  carriers  to  meet  capital  expendi- 
tures or  to  refund  securities,  or  the  Commission  might 
purchase  equipment  and  facilities  for  lease  to  carriers. 
Loans  were  to  be  made  at  6  per  cent.  They  were  to  be 
protected  by  adequate  security,  and  the  carrier  was  to 
demonstrate  its  need  for  the  money  and  the  public  inter- 
est to  be  served  by  the  expenditure,  and  to  furnish  reason- 


THE   PROBLEM   OF   RATES  229 

able  assurance  of  ability  to  repay  at  maturity.  Lease 
contracts  for  equipment  were  to  provide  a  rental  charge 
sufficient  to  cover  depreciation  and  a  return  of  6  per  cent 
upon  the  investment.  Any  carrier  building  a  new  line 
of  railroad  might  be  relieved  by  the  Commission  for  a 
maximum  of  ten  years  from  dividing  excess  earnings  de- 
rived from  the  new  construction.  That  the  existence  of 
an  excess  revenue  divisible  with  the  Government  was  not 
to  be  deemed  evidence  of  excessive  rates  was  indicated  by 
the  provision  that  no  shipper  would  be  permitted  to  re- 
cover for  excessive  rates  on  the  ground  that  a  particular 
rate  might  contribute  to  the  excess  income  paid  by  the 
carrier  to  the  Commission. 

So  much  for  the  bare  bones  of  the  statute.  A  careful 
analysis  of  its  provisions  reveals  many  novel  features. 
At  the  outset,  let  us  dispose  of  some  of  the  common  mis- 
conceptions with  reference  to  it.  In  the  first  place,  the  \ 
law  guarantees  nothing  to  any  individual  carrier,  and 
its  guarantee  to  carriers  as  a  whole  or  by  groups  is  a  [ 
distinctly  doubtful  one.  There  was  much  support  in  the 
congressional  hearings  for  a  provision  that  would  guar- 
antee to  railroads  a  minimum  return,  either  upon  invest- 
ment or  upon  securities.  This  would  have  meant  that 
independent  of  rates  charged  or  traffic  handled,  inde- 
pendent of  the  showing  of  the  income  account,  the  cor- 
poration would  have  been  assured  of  a  definite  return  to 
be  made  up,  if  there  were  a  deficit,  from  contributions 
by  the  Government.  No  proposal  could  have  been 
better  calculated  to  destroy  all  incentive  to  efficiency  and 
economy  in  operation.  It  would  have  applied  to  rail- 
roading the  cost-plus  contract  that  the  Government  found 
so  disastrous  during  the  war.  There  is  little  doubt  that 
the  unfavorable  results  shown  in  railroad  operation  under 
federal  control  after  the  armistice,  and  particularly  dur- 
ing the  guarantee  period,  March  to  September,  1920, 


230  RAILROADS  AND   GOVERNMENT 

were  in  part  attributable  to  the  existence  of  a  Government 
guarantee.  Expenses  could  not  be  and  were  not  guarded 
by  the  Government,  and  the  same  vigilance  was  not  to 
be  expected  on  the  part  of  operating  officers  that  would 
have  been  displayed  had  they  been  responsible  for  results 
to  their  boards  of  directors  alone.1  A  guarantee  such  as 
the  war  contract  provided,  with  no  danger  of  loss  and  with 
no  possibility  of  extra  profit,  destroyed  all  individual  in- 
terest in  results.  As  has  been  noted  elsewhere,  this  is  the 
most  persuasive  argument  against  the  five-year  extension 
plan  advocated  by  the  Directors- General.  It  could  have 
ended  only  in  Government  ownership,  and  that  is  the 
necessary  outcome  of  any  guarantee  plan.  The  Govern- 
ment's financial  interest  steadily  increases  and  the  pres- 
sure for  conversion  of  this  financial  claim  into  a  genuine 
title  to  property  becomes  irresistible. 

What  the  law  provided  was  that  the  railroads  should  be 
divided  by  the  Commission  into  regional  groups  and  that 
the  Commission  should  so  adjust  rates  that  the  carriers  of 
each  rate  group  might  earn  5^  per  cent  upon  the  aggre- 
gate value  of  the  property  of  the  group.  This  would  re- 
sult in  a  higher  rate  of  return  for  some  roads  and  a  lower 
rate  for  others,  depending  upon  relative  efficiency  in 
management,  favorableness  of  location  from  the  traffic 
or  the  operating  standpoint,  and  general  condition  of  the 
property  as  the  result  of  past  policies  and  experience. 
This  rate  of  return  that  the  Commission  was  instructed  to 
provide,  be  it  noted,  was  not  a  return  upon  securities,  but 
a  return  upon  property.  Whether  this  would  yield  any- 
thing to  the  stockholder  after  fixed  charges  had  been 

1  The  Commission  was  required  to  fix  the  amount  to  be  included 
in  operating  expenses  as  a  maintenance  charge  during  the  "guarantee 
period."  But  obviously  it  was  physically  impossible  for  the  Com- 
mission to  watch  the  expenditures  on  the  individual  road  in  any  effec- 
tive manner.  The  results  of  such  regulations  as  it  laid  down  could 
not  appear  until  the  roads  came  to  make  their  settlements  for  the 
"guarantee  period"  with  the  Government. 


THE  PROBLEM  OF  RATES  231 

satisfied  depended  upon  the  conservatism  of  the  capitali- 
zation and  the  relation  of  bonds  to  stock.  A  road  with 
small  bonded  debt  and  low  stock  capitalization  relative 
to  the  value  of  its  property  would  be  able  to  pay  generous 
dividends  under  this  plan,  but  a  road  heavily  over- 
capitalized, with  a  preponderance  of  funded  debt,  was  not 
likely  to  have  much  surplus  income  for  distribution  to 
stockholders.  However,  this  did  not  materially  alter  the 
situation  from  that  which  obtained  before  the  Act  was 
passed. 

Again,  it  should  be  noted  that  the  carrier  was  not  robbed 
of  all  incentive  to  increase  its  net  earnings.  If  it  was  one 
of  the  class  of  the  less  prosperous  roads  that  might  be 
expected  to  earn  less  than  6  per  cent,  there  was  the  oppor- 
tunity to  bring  the  business  up  to  a  6  per  cent  basis. 
There  was  no  less  of  an  incentive  up  to  a  certain  point 
than  prevailed  under  the  old  method  of  rate  making.  One 
computation  showed  that  during  the  "test  period,"  1915- 
1917,  109  out  of  162  Class  I  railroad  systems  operating 
89  per  cent  of  the  mileage  of  the  country  failed  to  earn 
6  per  cent  on  their  property  investment.  Hence  the 
requirement  of  a  division  of  excess  earnings  with  the 
Government  was  likely  for  some  time  to  come  to  affect 
only  a  small  minority  of  the  roads. 

In  the  case  of  the  more  prosperous  roads  the  limit  to 
earnings  was  an  elastic  one.  If  any  carrier  earned  in  ex- 
cess of  the  $}/2  per  cent  or  6  per  cent  return,  it  retained 
but  50  per  cent  of  this  excess.  The  balance  it  had  to 
turn  into  a  national  fund  for  the  benefit  of  transportation 
as  a  whole.  It  was  not,  be  it  noted,  turned  over  to  the 
less  prosperous  roads.  There  was  no  pooling  of  earnings. 
The  Government  took  possession  and  administered  the 
fund,  and  no  road  secured  any  portion  of  it  except  by 
paying  for  it.  The  portion  that  the  carrier  retained  was 
not  at  first  subject  to  its  free  disposition.  It  had  to  ac- 
cumulate a  reserve  for  dividends,  interest,  and  rentals 


232  RAILROADS  AND  GOVERNMENT 

until  the  fund  reached  5  per  cent  of  its  property  value. 
Then  any  further  accretions  were  at  its  unhampered  dis- 
posal. This  requirement  recognized  that  it  was  impossi- 
ble wholly^to  stabilize  earnings,  that  traffic  and  operating 
conditions  would  produce  fluctuations  from  year  to  year 
which  the  Commission  could  not  anticipate,  and  could 
not  prevent  if  it  did.  It  was  a  device  to  stabilize  the  re- 
turn to  the  bond  and  stock  holder  at  a  figure  that  public 
authority  regarded  as  a  fair  return. 

Whether  the  elasticity  of  the  limit  to  earnings  was  ade- 
quate to  insure  private  initiative  and  efficient  manage- 
ment could  only  be  demonstrated  by  actual  experiment. 
The  limitation  was  vigorously  opposed  by  the  carriers. 
It  should  be  noted  in  this  connection  that  after  March 
i,  1922,  the  Commission  adjusted  the  rate  of  return,  and 
it  is  obvious  that  in  making  such  adjustment  the  ques- 
tion whether  the  existing  rate  had  proved  high  enough 
to  establish  credit  would  be  a  pertinent  consideration. 

Why  this  method  of  recapturing  earnings  was  intro- 
duced into  the  law  is  stated  in  the  statute  itself  and  has 
already  been  quoted.  It  was  an  attempt  to  solve  what 
had  been  dubbed  for  many  years  "an  insoluble  problem." 
It  has  gradually  developed  from  a  debatable  proposition 
into  an  axiom  that  rates  on  competing  railroads  must 
be  the  same.  How,  then,  were  rates  to  be  so  fixed  as  to 
provide  a  reasonable  return  to  the  weak  or  badly  situated 
road  and  keep  it  out  of  bankruptcy,  and  at  the  same  time 
prevent  the  better  situated  or  managed  line  from  enjoy- 
ing an  unreasonably  high  return?  The  railroad  execu- 
tives had  argued  before  committees  of  Congress  for  a 
simple  statutory  rule,  which  should  require  that  the  level 
of  rates  prescribed  by  the  Commission  should  not  only 
be  reasonable  but  should  be  sufficient  to  protect  exist- 
ing investment  and  attract  the  capital  necessary  to  main- 
tain and  extend  the  properties  in  compliance  with  public 
requirements.  Their  attitude  toward  the  problem  of 


THE   PROBLEM  OF   RATES  233 

competitive  railroads  of  unequal  strength  showed  an  in- 
disposition to  meet  the  issue  squarely  and  see  it  through. 
They  suggested  rates  that  would  sustain  the  "average" 
road.  The  road  that  could  not  measure  up  to  this  stand- 
ard was  to  suffer  the  fate  it  deserved.  As  for  roads  that 
earned  a  return  much  higher  than  the  average,  that  was 
left  open  for  future  consideration. 

That  this  has  always  been  one  of  the  difficult  problems 
of  regulation  is  apparent  to  any  one  familiar  with  the 
decisions  of  the  Commission  in  cases  involving  rates  to 
be  prescribed  for  competitive  carriers.  As  far  back  as 
the  Spokane  Case  in  1909  the  Commission  said:1 

"The  whole  territory  served  by  these  defendant  lines 
must  be  considered  and  the  existence  of  all  these  rail- 
roads to  that  territory  is  absolutely  essential.  .  .  .  We 
must,  therefore,  in  fixing  these  rates,  have  regard  not 
altogether  to  any  one  particular  railroad,  but  to  the 
whole  situation  and  must  consider  the  effect  of  what- 
ever order  we  make  upon  all  these  defendants." 

In  the  investigation  of  rates  in  official  classification 
territory  in  1911,  in  which  the  Commission  denied  the  in- 
creases requested,  Commissioner  Prouty  sought  to  apply 
the  rule  just  quoted  to  the  situation  facing  him.  He  con- 
cluded to  take  the  three  lines,  the  New  York  Central, 
the  Pennsylvania,  and  the  Baltimore  and  Ohio,  as  typical 
and  then  added: 

"Under  rates  reasonable  for  these  three  systems  there 
may  be  lines  whose  earnings  will  be  extravagant,  but 
that  is  their  good  fortune.  There  may  be  lines  which 
cannot  make  sufficient  earnings,  but  that  is  their  mis- 
fortune. We  ought  not  to  impose  upon  this  territory, 
for  the  purpose  of  allowing  these  defendants  additional 
i 15  I.  C.  C,  393- 


234  EAILROADS   AND   GOVERNMENT 

revenues,  higher  rates  than  are  adequate  to  these  three 
systems  considered  as  a  whole."  1 

In  the  many  cases  involving  rates  on  competitive 
lines  that  were  in  different  financial  circumstances,  ship- 
pers opposing  the  increases  invariably  stressed  the  high 
earnings  that  would  result  to  the  more  fortunate  roads. 
There  is  little  doubt  that  the  reluctance  on  the  part  of 
the  Commission  to  grant  increases  was  in  part  due  not 
to  a  failure  to  realize  the  necessities  of  many  roads,  but 
to  an  unwillingness  to  accord  to  the  better  located  com- 
petitors earnings  in  excess  of  what  they  had  a  right  to 
collect  from  the  public.  For  the  fundamental  cause  of 
the  difference  in  earnings  between  the  prosperous  and 
the  poor  road  was  not  always  difference  in  efficiency  of 
management  but  often  difference  in  the  traffic  produc- 
tivity of  the  territory  served,  a  difference  which  was  in 
part,  at  least,  the  result  of  accidental  location.  Yet  the 
road  with  light  traffic  was  essential  to  its  community 
and  should  within  reason  be  sustained.  No  method  of 
meeting  this  troublesome  problem  had  existed  hereto- 
fore except  the  unsatisfactory  one  of  striking  an  aver- 
age. The  Commission's  burden  was  now  immensely  light- 
ened by  the  new  provision  which  determined  first  what 

.e  rate  of  return  should  be  for  the  particular  territory, 
and  then  provided  for  the  disposition  of  excess  earnings. 
No  longer  need  the  public  fear  exploitation  through 
excessive  rates,  neither  should  it  be  concerned  that  a 
railroad  system  which  is  reasonably  necessary  will  not 
be  awarded  rates  high  enough,  at  least  to  give  it  a  fight- 
ing chance  for  life.  The  public  and  the  large  majority 
of  the  roads  should  benefit  from  this  provision  which 
relieves  the  Commission  of  the  hampering  circumstances 
that  formerly  beset  it. 

Railroads  brought  their  heaviest  guns  to  bear  to  dem- 
1 20  I.  C.  C.,  274. 


THE   PROBLEM   OF   RATES  235 

onstrate  that  the  whole  recapture  plan  was  unconsti- 
tutional, and  eminent  counsel  was  employed  on  both 
sides  to  argue  the  question  before  committees  of  Con- 
gress. It  was  the  contention  of  railroad  counsel  that 
earnings  from  reasonable  rates  were  the  property  of  the 
carriers  that  performed  the  service,  and  that  any  device 
such  as  the  creation  of  a  trust,  was  a  deprivation  of  prop- 
erty without  compensation  and,  therefore,  unconstitu- 
tional. It  was  pointed  out  that  even  though  specific 
rates  had  not  been  passed  upon  by  commissions,  never- 
theless the  regulating  authority  had  been  in  existence 
for  many  years  and  rates  that  were  undisturbed  could 
not  be  presumed  to  be  unreasonable.  It  was  contended 
that  the  attempt  to  recapture  earnings  was  wholly  un- 
precedented, that  statutes  and  courts  had  confined  them- 
selves to  restraint  of  the  rates  from  which  the  earnings 
were  derived,  and  had  never  attempted  to  take  away 
what  had  lawfully  come  into  the  possession  of  the  carrier. 
Moreover,  it  was  contended  that  the  scheme  placed  an 
unfair  burden  on  the  patrons  of  the  prosperous  road  to 
furnish  transportation  for  other  communities,  and  that 
the  plan  could  not  be  defended  as  a  valid  exercise  of  the 
taxing  power,  because  the  property  was  not  taken  for 
proper  governmental  purpose  or  for  public  use  upon  pay- 
ment of  just  compensation.  It  was  merely  a  device  for 
solving  a  difficult  situation,  a  plausible  defense  for  which 
had  been  sought  in  law. 

The  position  of  the  proponents  who  carried  their  point 
and  persuaded  Congress  to  try  the  plan,  was  that  no  rail- 
road corporation  could  be  considered  by  itself,  that  the 
exigency  in  which  roads  of  varying  financial  strength 
were  operating  side  by  side  required  that  if  increases  in 
rates  were  to  be  made  at  all,  the  obstacle  which  had  so 
long  blocked  the  way  to  adequate  relief  for  the  weaker 
road, — that  the  relief  would  confer  an  excessive  return 
upon  the  prosperous  competitor, — must  be  removed.  The 


236  RAILROADS  AND   GOVERNMENT 

only  thing  that  the  plan  confiscated  was  the  opportunity 
on  the  part  of  certain  carriers  to  earn  excessive  returns. 
In  answer  to  the  claim  that  such  procedure  was  un- 
known in  law,  it  was  pointed  out  that  many  states  in 
their  early  history  granted  charters  which  provided  that 
earnings  beyond  a  certain  per  cent  on  the  stock  were 
to  be  turned  back  to  the  state.  Of  course  this  conten- 
tion was  purely  academic,  for  none  of  these  state  pro- 
visions was  ever  judicially  tested.  Moreover,  the  maxi- 
mum rate  of  return  was  often  fixed  so  high  that  it  was 
never  reached,  and,  if  it  had  been,  there  would  have  been 
nothing  there  to  divide,  for  the  roads  were  free  to  pad 
their  operating  expenses,  and  in  most  states  stock-water- 
ing flourished  without  interference.  Whether  the  plan 
will  stand  the  legal  test  and  whether,  if  it  does,  it  will  ac- 
complish its  purpose  are  questions  for  the  future.  For, 
like  many  of  the  early  roads  whose  dividends  were  limited, 
the  carriers  have  not  attained  to  that  happy  state  when 
they  yet  have  anything  to  divide.  However,  it  is  diffi- 
cult to  characterize  the  clause  as  confiscatory  in  the  face 
of  the  application  of  the  same  principle  on  a  large  scale 
in  our  taxation  policy.  It  is  the  principle  of  the  excess- 
profits  tax — a  tax  of  50  per  cent  upon  differential  profits 
above  a  certain  fixed  amount. 

Assuming  the  constitutionality  of  the  clause,  the  ques- 
tion arises  as  to  its  practical  working.  The  fact  that 
it  is  in  a  sense  a  guarantee  necessitates  a  close  watch  on 
the  part  of  the  Government  of  the  way  in  which  gross 
earnings  are  expended.  A  mandate  is  given  to  the  Com- 
mission to  see  that  railroad  operation  is  honest,  eco- 
nomical, and  efficient.  The  extent  to  which  the  Com- 
mission is  capable  of  doing  this  will  determine  to  a  degree 
the  operating  income  to  be  divided.  In  the  multitude 
of  railroads  and  their  wide  geographical  distribution  lies 
the  difficulty  of  adequate  supervision  of  operating  ac- 
counts by  the  Commission.  Yet  under  the  accounting 


THE  PROBLEM   OF  RATES  237 

regulations  of  the  Commission  there  is  a  definite  limit 
beyond  which  the  carrier  cannot  go  in  charging  expendi- 
tures to  operation.  The  railway  operating  income,  which 
is  the  item  subject  to  division  with  the  Government, 
contains  all  transportation  earnings  except  what  are 
necessary  to  cover  operating  expenses,  taxes,  and  the 
settlement  of  certain  joint-facility  accounts  between 
roads.  Capital  expenditures  must  be  made  from  net 
operating  income  and  cannot  be  charged  to  operating 
expense.  So  far,  then,  as  regulations  are  concerned,  the 
Government's  share  of  operating  income  is  protected, 
but  the  situation  will  require  eternal  vigilance  on  the 
part  of  the  Commission's  examining  force. 

What  will  be  the  effect  of  this  provision  upon  the  sup- 
ply of  new  capital  is  another  question.  What  the  capi- 
tal market  is  to  be  and  what  place  railroad  securities 
will  occupy  cannot  now  be  more  than  guessed  at.  It  was 
insisted  by  the  railroad  executives  that  the  clause  was 
drawn  in  the  interest  of  the  bondholders  and  that  it  would 
seriously  interfere  with  the  policy  of  capitalizing  through 
issues  of  stock,  for  it  would  tend  to  reduce  the  proba- 
ble return  of  the  stockholder  who  assumes  all  the  risk 
to  a  rate  approaching  that  guaranteed  to  the  bondholder. 
If  that  should  turn  out  to  be  the  result,  it  would  furnish 
strong  ground  for  modification,  as  the  tendency  has 
been  far  too  strong  in  recent  years  toward  the  use  of 
funded  obligations  to  obtain  new  capital. 

There  are  many  technical  problems  of  administration 
involved  in  the  working  out  of  the  law.  There  is  the 
question  as  to  what  constitutes  the  value  of  railroad 
property  "held  for  and  used  in  the  service  of  transpor- 
tation." This  was  of  course  the  fundamental  question 
in  the  application  for  increased  rates  in  the  summer  of 
1920.  Little  help  is  to  be  derived  from  the  statute, 
which  authorizes  the  Commission  to  utilize  the  results 
of  its  valuation  survey  so  far  as  these  are  available,  and 


238  RAILROADS  AND   GOVERNMENT 

to  give  to  the  book  accounts  of  the  carriers  such  con- 
sideration as  they  are  legally  entitled  to.  It  was  hardly 
possible  that  the  Commission  could  rely  to  any  large 
degree  upon  the  work  of  the  Bureau  of  Valuation  beyond 
the  use  of  the  general  principles  and  experience  derived 
from  the  preliminary  surveys,  and  the  advice  of  experts 
directly  engaged  in  that  work.  For  at  the  time  of  the 
hearings  on  rate  increases,  the  Commission  had  fixed  no 
final  valuation  for  any  carrier,  and  had  served  upon  car- 
riers only  nine  tentative  valuations  covering  4,688  miles 
of  road.  Most  of  the  roads  were  small.  Some  of  them 
were  in  the  hands  of  receivers.  The  reports  on  these 
roads  omitted  many  factors  that  the  carriers  contended 
should  be  inserted  before  final  valuations  were  declared. 
Yet  it  was  the  carriers'  contention  that  the  results  of 
the  work  then  completed  abundantly  established  the  posi- 
tion that  the  cost  of  reproduction  of  the  properties  would 
be  found,  when  the  valuation  was  finished,  to  be  sub- 
stantially in  excess  of  the  amounts  shown  in  the  prop- 
erty investment  accounts.  They  accordingly  urged  the 
acceptance  by  the  Commission  of  the  book  accounts  of 
the  railroads  as  a  basis  for  the  computation  of  the  fair 
return  prescribed  by  Congress,  although  recognizing  the 
weakness  in  many  respects  of  these  accounts  as  an  ac- 
curate measure  of  value.  In  its  rate  decision  rendered 
on  July  29,  1920,  the  Commission  did  not  clearly  indi- 
cate how  it  arrived  at  its  estimate  of  property  values. 
It  stated  that  so  far  as  the  valuation  work  had  produced 
results  showing  general  tendencies  and  principles,  it  gave 
consideration  thereto.  It  appeared  to  have  followed  the 
suggestions  made  by  Justice  Harlan  in  Smyth  v.  Ames 
as  to  the  proper  considerations  to  be  taken  into  account 
in  determining  value,  such  as  the  probable  earning  ca- 
pacity of  the  properties  under  particular  rates  prescribed 
by  law,  the  sums  required  to  meet  operating  expenses, 
the  amount  and  market  value  of  bonds  and  stock.  More- 


THE  PROBLEM   OF   RATES 


239 


over,  it  considered  the  investment  accounts  as  they  had 
been  under  supervision  since  1907,  and  it  gave  attention 
to  the  carriers  as  going  concerns  with  their  requirements 
of  working  capital.  From  a  consideration  of  all  the  facts 
of  record,  the  Commission  found  the  value  of  the  rail- 
road properties  and  fixed  this  value  at  approximately 
$1,100,000,000  less  than  the  book  accounts  of  the  car- 
riers. The  detailed  figures  are  given  in  the  following 
table : 


BOOK  COST  OF  ROAD 
AND  EQUIPMENT, 
DEC.  31,  1919 

PROPERTY  VALUE  FIXED 
BY  THE   COMMISSION, 
JULY   29,  1920 

Eastern  group  

$0,0^8,104,61  s 

$8,8OO,OOO,OOO 

Southern  group  

2.18^,02^,124. 

2,OOO,OOO,OOO 

Western  group  

8,818,454,872 

8,IOO,OOO,OOO 

This  reduced  the  property  investment  accounts  of  the 
Eastern  carriers  by  about  2>£  per  cent  and  the  South- 
ern and  Western  carriers  by  over  8  per  cent. 

Attempts  were  made  in  Congress,  while  the  bill  was 
pending,  to  prevent  the  use  of  book  accounts  of  the  rail- 
roads as  evidence  of  value  of  property,  on  the  ground 
that  these  accounts  were  commonly  manipulated  and  con- 
tained many  worthless  items,  the  results  of  an  earlier 
and  more  irresponsible  period  of  railroad  accounting. 
But  the  conservative  policy  of  many  of  the  roads,  the 
reconstruction  of  property  accounts  that  has  taken  place 
in  many  cases,  the  facts  that  have  been  revealed  by  the 
valuation  investigations  now  under  way,  the  general 
information  in  the  possession  of  numerous  accounting 
officers  who  have  had  oversight  of  accounting  practice, 
all  lead  to  the  conclusion  that  however  unsatisfactory 
the  property  accounts  of  many  roads  may  be,  an  enor- 
mous real  value  is  there  represented  which  can  be  con- 
fidently used  as  a  sound  basis  for  rate  making.  More- 
over, this  account  is  gradually  improving  through  the 


240  RAILROADS   AND    GOVERNMENT 

exercise  by  the  Commission  of  the  accounting  authority 
granted  to  it  in  1906.  The  "cost  of  road  and  equip- 
ment" of  all  carriers,  excluding  switching  and  terminal 
companies,  as  reported  by  the  Commission,  increased 
from  $13,000,000,000  on  June  30,  1908,  to  over  $19,000,- 
000,000  on  December  31,  1919.  This  increase  of  over 
$6,000,000,000  is  equivalent  to  over  $25,000  per  mile 
on  the  235,000  miles  of  railroad  represented  in  the  1919 
figure.  Surely,  with  all  this  value  actually  present  in 
the  property,  there  is  little  ground  for  the  wholesale 
denunciation  of  railroad  accounts  with  which  the  public 
is  being  constantly  bombarded. 

It  will  be  of  interest  to  follow  further  the  rate  decision 
of  the  Commission  in  I9201  as  the  first  application  of 
the  new  principles  in  rate  making.  In  conformity  with 
the  authority  granted  by  Congress,  the  Commission  di- 
vided the  country  into  four  rate  groups:  the  Eastern, 
Southern,  Western,  and  Mountain-Pacific.  These  groups 
corresponded  substantially  with  the  classification  terri- 
tories, and  with  the  groups  into  which  the  railroads  had 
been  thrown  for  statistical  purposes  by  the  Commission, 
except  that  the  Western  group  was  divided,  and  the 
territory  west  of  the  Colorado  common  points,  being  in 
a  better  financial  condition  than  the  eastern  portion  and 
enjoying  higher  rates,  was  made  a  separate  group. 

The  next  step  was  to  prescribe  such  rates  as  would 
presumably  yield  a  return  of  5^  or  of  6  per  cent  upon  the 
"fair  value"  of  the  aggregate  property  of  each  of  the 
rate  groups.  The  method  of  determining  value  has  al- 
ready been  described.  The  Commission  decided  to  allow 
the  carriers  the  additional  ^2  of  i  per  cent  for  "im- 
provements, betterments,  or  equipment  .  .  .  chargea- 
ble to  capital  account,"  so  that  its  rate  computations 
were  made  upon  an  assumption  of  a  6  per  cent  return. 
How  the  expenditure  of  the  additional  ^2  per  cent  is  to 
1  Ex  parte  74,  58  I.  C.  C.,  220  (July  29,  1920). 


THE  PROBLEM  OF  RATES  241 

be  supervised  does  not  yet  appear.  It  will  of  course  be- 
come a  practical  question  only  in  the  case  of  those  roads 
that  earn  in  excess  of  5^/2  per  cent.  Roads  that  earn  less 
will  presumably  be  under  no  obligation  to  spend  any  defi- 
nite per  cent  of  earnings  on  betterments.  Those  of  the 
Eastern  group  received  an  increase  in  charges  for  freight 
service  of  40  per  cent,  the  Southern  group  an  increase 
of  25  per  cent,  the  Western  group  35  per  cent,  and 
the  Mountain-Pacific  group  25  per  cent.  Increases  were 
also  granted  in  passenger  and  Pullman  fares.  That 
the  Commission  was  disposed  to  give  the  carriers  full 
opportunity  to  earn  the  maximum  permitted  by  law  was 
evident  from  the  fact  that  it  followed  very  closely  the 
per  cent  of  increase  requested  by  the  carriers,  a  rate  of 
increase  which  had  been  calculated  by  them  in  the  most 
generous  manner  possible.  The  traffic  figures  which 
they  employed  to  compute  gross  earnings  under  the  new 
rates  were  those  of  the  year  ending  October  31,  1919, 
which  was  the  lightest  traffic  year  since  1916,  and  the 
cost  data  from  which  they  estimated  their  probable  op- 
erating expenses  were  those  of  March  1920,  which  date 
was  practically  at  the  peak  of  high  prices.  The  decision 
of  the  Commission  worked  out  statistically  to  give  the 
roads  an  operating  income  about  20  per  cent  higher  than 
the  average  of  the  three  "test  years,"  1915-1917,  which 
was  the  standard  return  guaranteed  during  federal  con- 
trol. Said  the  Commission  in  commenting  upon  this 
decision:1 

"The  only  basis  of  comparison  available  in  determin- 
ing the  rates  which  should  be  established  ...  is  to  be 
found  in  the  volume  of  traffic  in  the  past,  and  estimates 
of  the  expenses,  volume  of  traffic,  and  other  relevant 
factors  likely  to  exist  in  the  near  future.  Necessarily, 
rates  so  established  have  an  element  of  uncertainty  be- 

1  Annual  Report,  1920,  page  10. 


242  RAILROADS  AND    GOVERNMENT 

cause  the  costs,  volume  of  traffic,  and  other  factors  to 
be  encountered  by  the  carriers  are  not  ascertainable 
with  exactness.  It  is  therefore  impossible  to  speak  with 
confidence  as  to  results  until  a  reasonable  period  has 
elapsed." 

Because  of  the  peculiar  nature  of  the  New  England 
rate  situation,  it  will  be  of  interest  to  follow  the  decision 
of  the  Commission  in  "Ex  parte  74"  a  little  further.  The 
New  England  roads,  although  struggling  with  many 
problems  peculiar  to  themselves,  such  as  excess  of  passen- 
ger traffic  and  of  less-than-car-load  freight  traffic,  the 
pronounced  terminal  character  of  their  operations  and  the 
predominance  of  short  hauls,  elected  to  join  the  Eastern 
group  of  carriers  and  throw  themselves  on  the  mercy 
of  the  Commission  for  relief  from  their  peculiar  difficul- 
ties.1 The  Commission  included  them  in  the  Eastern 
group  but  made  no  special  rate  rulings  applicable  to 
them,  contenting  itself  with  urging  that  the  Eastern 
carriers  give  careful  consideration  to  the  divisions  of 
joint  rates  which  should  recognize  the  disproportionate 
needs  of  the  New  England  carriers.  But  all  attempts 
to  accomplish  a  result  satisfactory  to  New  England 
through  voluntary  negotiation  with  trunk-line  carriers 
failed  and  the  Commission  was  obliged  to  consider  the 
problem  formally.  Its  decision  in  July  1921?  f6und 
that  the  existing  divisions  of  joint  rates  were  violations  of 
the  Act,  in  that  they  were  lacking  in  uniformity,  equal- 
ity, system,  and  order,  but  that  the  testimony  being  of  a 
general  character  did  not  afford  a  basis  for  a  valid  pre- 
scription of  divisions  of  through  rates.  Accordingly,  the 
record  was  to  be  left  open  for  readjustments  to  be  pro- 
posed by  the  interested  carriers. 

1  The  Commission  had  granted  to  New  England  increases  in  both 
freight  and  passenger  fares  in  April,  1918,  just  previous  to  the  increase 
in  rates  ordered  by  the  Director-General.  (49  I.  C.  C.,  421.) 

'62  I.  C.  C.,  513. 


THE  PROBLEM  OF  RATES  243 

In  this  decision  there  were  four  dissenting  opinions, 
and  it  is  with  the  position  of  the  dissenters  that  this 
discussion  is  concerned,  for  it  helps  to  bring  out  the  sig- 
nificance of  the  new  rate  policy.  The  amendment  of 
I92O1  provides  that  the  Commission,  in  exercising  its 
power  over  equitable  divisions  of  joint  rates,  shall  give 
due  consideration  to  efficiency  of  operation,  the  amount 
of  revenue  required  to  pay  operating  expenses,  taxes, 
and  a  fair  return  on  property,  and  the  importance  of  this 
transportation  service  to  the  public.  Also  it  must  take 
into  account  whether  any  participating  carrier  is  an  origi- 
nating, an  intermediate,  or  a  delivering  line,  and  any 
other  circumstance  that  would  warrant  a  departure  from 
the  mileage  basis  of  rate  division.  It  was  the  view  of 
the  majority  of  the  Commission  that  the  problem  of 
division  of  joint  rates  should  be  handled  item  by  item 
upon  specific  and  detailed  evidence.  On  the  other  hand, 
the  minority,  in  a  forceful  argument,  maintained  that  the 
purpose  of  the  Act  was  to  assure  a  sound  and  healthy 
national  transportation  system,  and  that  the  financial 
needs  of  the  New  England  carriers  were  a  vital  considera- 
tion, because  important  carriers  with  conservative  prop- 
erty investment  were  near  the  brink  of  financial  trouble. 
A  prompt  remedy  was  required  and  the  Commission 
was  imposed  specifically  with  the  duty  of  taking  care  of 
critical  cases  of  this  character.  If  the  general  theory  of 
the  rate  section  of  the  Act  is  sound,  and  if  it  is  sus- 
tained by  the  public  and  the  courts,  it  is  a  fair  proph- 
ecy that  the  minority  view  in  this  case  will  eventually 
become  that  of  the  majority.  Certain  it  is  that  with  a 
deadlock  prevailing  between  trunk-line  and  New  England 
carriers  and  disagreement  among  the  trunk  lines  them- 
selves, the  Commission  in  shifting  the  problem  back  to 
the  roads  has  merely  gained  a  respite,  not  an  exemption, 
from  its  obvious  responsibility. 

1  Sec.  15  (6). 


244  RAILROADS  AND   GOVERNMENT 

In  spite  of  all  favoring  circumstances,  the  outcome  of 
the  general  rate  case  was  disastrous.  For  a  few  months 
it  appeared  that  the  financial  troubles  of  the  railroads 
had  been  solved,  but  soon  traffic  fell  off  sharply,  and  by 
the  first  of  the  year  1921  many  of  the  roads  were  not 
earning  their  operating  expenses.  While  in  some  in- 
stances, particularly  as  applied  to  heavy  commodities 
like  agricultural  products,  the  rates  may  have  been  too 
high  and  have  resulted  eventually  in  checking  traffic,  a 
study  of  the  industrial  situation  during  the  summer  and 
fall  of  1920  reveals  the  signs  of  approaching  general  de- 
pression. Employment  was  decreasing,  the  consumers' 
purchasing  power  was  declining.  Dullness  was  trans- 
mitting itself  from  retailer  to  wholesaler  and  back  to 
manufacturer  and  producer  of  raw  materials.  This 
movement,  which  had  to  run  its  inevitable  course,  was 
already  under  way  before  railroad  rates  went  up. 

Now  that  the  rate  section  has  been  treated  in  detail, 
its  most  significant  features  may  be  briefly  summarized. 
Before  the  passage  of  the  Act  of  1920  Congress  had  not 
gone  beyond  the  point  of  laying  down  the  general  princi- 
ple that  rates  should  be  reasonable  and  non-discriminat- 
ing. The  determination  of  the  specific  rate  and  the 
probable  consequences  thereof  were  left  to  the  judgment 
of  the  Commission.  In  this  Act  Congress  assumes  di- 
rect responsibility  for  deciding  what  is  a  sufficient  re- 
turn upon  the  property  of  a  carrier.  To  be  sure,  it  limits 
its  authority  to  two  years,  turning  the  power  thereafter 
over  to  the  Commission,  but  for  the  time  being  it  de- 
clares what,  in  its  judgment,  is  a  fair  return  upon  the 
fair  value  of  railroad  property.  Doubtless  it  was  guided 
in  the  determination  of  the  rate  by  the  experience  of  the 
Commission  in  earlier  rate  cases  of  large  proportions. 
In  the  5  per  cent  case  in  1914,  the  Commission  had  held 
that  an  average  operating  income  of  5.64  per  cent  upon 


THE  PROBLEM  OF  RATES  245 

the  property  over  a  period  of  fourteen  years  was  smaller 
than  was  demanded  in  the  interests  of  both  the  general 
public  and  the  railroads. 

In  the  next  place,  Congress  specifically  declared  for  a 
return  to  the  carriers  based  upon  the  value  of  their  prop- 
erty. To  be  sure,  this  was  a  policy  which  was  becoming 
general  among  regulating  bodies,  and  had  been  gaining 
steadily  in  favor  ever  since  the  decision  in  Smyth  v.  Ames 
in  1898.  Yet  its  specific  establishment  here  is  not  with- 
out significance.  While  no  guide  for  the  determination 
of  fair  value  is  laid  down,  the  Commission  is  instructed 
to  make  use  of  the  results  of  its  valuation  survey  as 
rapidly  as  they  are  available.  The  settlement  by  the 
courts  of  what  constitutes  fair  value  in  connection  with 
the  controversies  that  will  arise  in  the  valuation  of  indi- 
vidual railroad  properties  will  eventually  fashion  a  rule 
that  will  be  followed  by  the  Commission  in  the  adminis- 
tration of  this  rate  section.  One  bogey  at  least  should 
be  well-nigh  disposed  of,  and  that  is  the  bogey  of  over- 
capitalization. Return  on  capital  securities  received  no 
attention  in  this  statute.  The  stockholder  gets  whatever 
there  is  to  divide  after  the  operating  income  has  been 
drawn  upon  for  the  contractual  obligations.  But  the 
return  which  the  Commission  is  under  obligation  to  as- 
sure to  the  carriers  is  a  return  on  property,  not  on  se- 
curities. 

Finally,  the  Congress  has  laid  upon  the  Commission 
an  obligation  which,  if  it  existed  before,  was  not  clearly 
indicated  in  the  statute,  an  obligation  to  provide  the 
public  with  adequate  transportation,  and  to  see  to  it  that 
the  carriers  under  honest  and  efficient  management  earn 
enough  to  assure  to  the  public  this  service.  And  this 
means  a  credit  with  the  investing  community  sufficient 
to  obtain  the  funds  necessary  to  keep  pace  with  public 
requirements.  That  this  is  a  change  in  conception  of  the 
function  of  the  Commission  will  be  evident  to  one  who 


246  RAILROADS   AND   GOVERNMENT 

has  followed  the  decisions  of  the  Commission  in  detail, 
particularly  those  having  to  do  with  rate  problems  cover- 
ing large  territories.  There  has  been  a  growing  tendency 
in  the  Commission  to  insist  upon  a  broad  interpretation 
of  its  powers,  and  away  from  the  narrow  judicial  attitude 
which  confined  itself  to  the  reasonableness  of  a  specific 
rate  or  schedule,  without  reference  to  the  effect  upon  the 
general  financial  condition  of  the  carriers.  This  grow- 
ing tendency  was  discussed  and  illustrated  at  length  in 
connection  with  the  important  rate  cases  of  the  first  half 
of  the  decade,  and  it  is  this  point  of  view  that  is  embodied 
in  the  rate  section  of  the  Transportation  Act  of  1920. 
Congress  has,  by  express  grant,  placed  upon  the  shoulders 
of  the  Commission  the  responsibility  of  providing,  through 
its  rate-fixing  powers,  the  transportation  service  that  the 
public  interest  demands. 


CHAPTER  XVII 

THE  PROBLEM  OF  RATES 
(CONTINUED) 

i.    Rate  Suspension 

IN  the  Transportation  Act  of  1920  there  was  no  dis- 
position to  eliminate  the  rate-suspension  power  of  the 
Commission.  Its  value  as  a  protection  to  the  consum- 
ing public  was  too  thoroughly  appreciated.  But  there 
was  a  feeling,  with  which  the  Interstate  Commerce  Com- 
mission itself  was  in  sympathy,  that  the  time  within  which 
rates  could  be  held  in  suspense  was  needlessly  long,  that 
the  carriers,  even  in  cases  of  wide  extent  and  large  im- 
port, were  entitled  to  a  decision  in  a  period  short  of  ten 
months,  that  if  the  Commission  was  overburdened  with 
cases  and  found  itself  unable  to  render  prompt  verdict, 
the  obvious  solution  was  an  enlarged  Commission,  prop- 
erly organized  to  take  care  of  its  work;  that,  in  other  words, 
the  railroads  should  not  be  made  to  suffer  for  the  inade- 
quacy of  the  Commission's  machinery.  Many  cases  had 
dragged  along  interminably,  and  in  many  instances  the 
Commission  had  been  obliged  to  request  from  the  car- 
riers a  further  extension  beyond  the  ten  months'  limit, 
which  was  usually  acceded  to.  Shipper  and  carrier  alike 
would  be  benefited  by  a  shortening  of  the  period  of  un- 
certainty and  much  expense  would  be  saved. 

To  be  sure,  the  Commission  had  improved  steadily  in 
the  efficiency  with  which  it  had  handled  its  cases,  due  in 
part  to  an  enlarged  personnel,  in  part  to  a  more  systematic 
organization  and  division  of  authority  among  groups  of 
commissioners.  By  an  Act  passed  on  August  9,  191 7, l 

1 U.  S.  Stat.  L.,  vol.  40,  page  270. 

247 


248  RAILROADS  AND   GOVERNMENT 

the  membership  of  the  Commission  was  increased  from 
seven  to  nine,1  and  it  was  authorized  to  act  through  sub- 
>*  divisions,  which  it  could  create  to  any  number  it  desired. 
To  these  divisions  the  Commission  could  assign  any  func- 
tion arising  under  the  Act,  and  any  decision  of  a  division 
was  to  be  of  the  same  effect  as  though  made  by  the  entire 
Commission,  and  was  subject  to  rehearing  by  the  Com- 
mission. Questions  involving  reasonableness  of  rates  or 
discrimination  required  a  membership  of  three  in  the 
division,  and  valuation  questions  a  membership  of  five.2 
In  conformity  with  the  statute,  the  Commission  was 
divided  into  three  divisions,  and  it  was  provided  that  any 
division  might  call  upon  the  entire  Commission  for  ad- 
vice or  for  the  assignment  of  additional  commissioners 
for  the  hearing  of  specific  cases.  Except  for  important 
cases  which  are  reserved  for  hearing  by  the  entire  Com- 
mission, cases  are  now  assigned,  considered,  and  disposed 
of  in  rotation,  one  of  three  divisions  sitting  in  argument, 
while  the  other  two  are  disposing  of  cases  and  handling 
the  variety  of  auxiliary  functions.  Among  the  three  divi- 
sions are  distributed  the  various  administrative  and  super- 
visory functions  which  the  Commission  has  gradually  ac- 
cumulated during  its  life,  such  as  oversight  of  safety-ap- 
pliance and  hours-of-service  acts,  valuation,  suspension 
of  rates,  transportation  of  explosives,  long  and  short  haul 
applications  and  those  for  posting  and  filing  of  rates,  and 
the  disposition  of  cases  heard  by  examiners.  In  the  re- 
organization, provision  has  been  made  for  keeping  the 
entire  Commission  in  close  touch  and  harmonious  co-op- 
eration with  the  activities  of  the  subdivisions.  Hence, 

1  Increased  to  eleven  by  the  Act  of  1920,  since  which  time  the  Com- 
mission has  increased  the  number  of  divisions  from  three  to  five.     The 
increase  of  administrative  duties  with  the  Act  of  1920  has  materially 
added  to  the  labors  of  the  Commission.     See  Annual  Report,   1920, 
page  3. 

2  Amended  in  1920,  so  that  each  division  is  to  consist  of  at  least 
three  members.     Sec.  17  (2-4). 


THE   PROBLEM   OF   RATES  249 

efficiency  has  been  gained  without  sacrificing  the  unity 
necessary  to  the  preservation  of  its  authority  and  pres- 
tige. 

With  this  reorganization  and  the  resulting  efficiency, 
it  was  not  only  safe  but  wise  to  shorten  the  period  of  rate 
suspension,  and  this  was  done  in  the  Act  of  1920.  The 
first  period  of  suspension  remains  as  originally  prescribed 
— 1 20  days — but  an  extension  is  now  limited  to  30  days, 
making  the  entire  period  5  months  instead  of  10.  Rates 
are  automatically  to  go  into  effect  at  the  end  of  this  period 
if  the  issue  is  not  decided,  but  if  increased  freight  rates 
are  involved  the  Commission  may  require  the  carrier  to 
keep  an  account  showing  by  whom,  and  in  whose  behalf, 
payments  have  been  made,  and  if  the  decision  is  adverse 
to  the  carrier  to  refund  with  interest  such  portion  of  the 
increased  rates  as  is  found  not  to  be  justified. 

The  curtailment  of  the  suspension  period  has  had  a 
stimulating  effect  upon  the  Commission's  procedure. 
Under  previous  conditions,  a  majority  of  cases  required 
the  full  ten  months'  period,  the  average  time  for  all  cases 
being  about  eight  months.  Cases  were  set  for  hearing 
thirty  to  sixty  days  after  the  tariffs  were  suspended,  and 
were  handled  in  a  routine  manner.  Now  they  are  ad- 
vanced for  hearing,  given  precedence  over  most  other 
Commission  business,  and  every  effort  is  made  to  reach 
speedy  decision. 

Since  the  new  law  went  into  effect  the  Commission  has 
found  it  possible  to  dispose  of  all  suspension  cases  except 
a  very  few,  which  were  unusually  voluminous  or  contained 
matters  of  peculiar  difficulty,  within  the  allotted  time  of 
five  months.  In  case  the  Commission  finds  it  cannot 
reach  a  decision  within  the  statutory  period,  it  requests 
from  the  carriers  a  voluntary  suspension  for  an  additional 
time.  In  every  instance  the 'carriers  have  complied,  al- 
though in  one  or  two  cases  this  compliance  has  been  real- 
ized only  after  the  Commission  had  intimated  that  other- 


250  RAILROADS   AND   GOVERNMENT 

wise  it  would  compel  the  carriers  to  keep  an  account  and 
refund  the  increases  with  interest  in  case  they  were  later 
found  to  be  unlawful.  It  appears,  then,  that  the  refund 
provision  of  the  law  finds  its  greatest  usefulness  at  present 
as  a  club  that  the  Commission  may  swing  over  the  head 
of  the  carrier. 

It  is  fortunate  that  this  refund  procedure  was  not  made 
mandatory  upon  the  Commission,  for  this  cumbersome 
method  may  well  prove  to  be  impracticable.  It  is  an 
attempt  to  strike  a  middle  ground  between  making  effec- 
tive the  new  rates  before  they  have  been  passed  upon, 
and  thus,  in  case  they  are  eventually  disapproved,  load- 
ing the  shipper  with  unjust  burdens  for  which  he  cannot 
be  recompensed,  and,  on  the  other  hand,  preventing,  for  a 
number  of  months,  the  collection  by  the  carriers  of  rates 
that  may  eventually  be  approved,  and  thus  depriving 
them  of  justifiable  revenue.  This  compromise  gives  an 
appearance  of  fairness  that  it  does  not  actually  possess, 
I  for,  as  has  been  already  noted,  freight  rates  in  large  mea- 
sure find  their  way  into  price.  The  shipper  or  consignee 
who  pays  the  freight  bill  in  the  first  instance  may  have 
his  name  recorded  on  the  books  of  the  railroad  as  the  per- 
son "by  whom  or  in  whose  behalf"  the  amount  was  paid, 
but  long  before  the  Commission  has  rendered  its  decision 
he  will  have  reimbursed  himself  through  his  sales.  If  he 
later  becomes  the  recipient  of  a  refund,  he  recovers  the 
freight  charges  twice  over.  There  may  be  instances  when 
the  process  does  not  work  in  this  fashion,  and  it  may 
be  within  the  capacity  of  the  Commission  to  distinguish 
cases.  If  so,  it  is  fortunate  that  the  power  to  require  this 
refunding  procedure  is  discretionary. 

The  same  problem  has  long  been  present  in  reparation 
cases,  that  is,  in  the  award  of  damages  against  a  carrier 
for  unreasonable  or  discriminating  rates,  a  power  granted 
to  the  Commission  in  1906.*  The  Supreme  Court  has 

lSec.  16  (i). 


THE  PROBLEM  OF  RATES  251 

held  that  in  a  discrimination  case  the  damage  to  the  com- 
plainant, if  any,  may  be  the  exact  difference  between  the 
rates  paid  by  the  complainant  and  by  his  competitor.  But 
whatever  the  damage  is,  he  must  prove  his  damage  with 
the  same  degree  of  certainty  that  would  be  required  for  a 
judgment  in  court.1  But  when  the  reparation  concerns 
an  unreasonable  rate,  neither  the  Commission  nor  the 
court  has  required  proof  of  damage,  but  has  contented 
itself  with  deciding  that  the  measure  of  damage  is  the 
difference  between  the  rate  paid  and  the  reasonable  rate. 
The  shipper  may  have  passed  the  rate  on  in  the  sale  of 
his  goods,  and  in  most  cases  has  done  so.  But,  says 
the  court,2  "  the  general  tendency  of  the  law,  in  regard  to 
damages  at  least,  is  not  to  go  beyond  the  first  step.  .  .  . 
The  carrier  ought  not  to  be  allowed  to  retain  his  illegal 
profit,  and  the  only  one  who  can  take  it  from  him  is  the 
one  that  alone  was  in  relation  with  him,  and  from  whom 
the  carrier  took  the  sum.  Behind  the  technical  mode  of 
statement  is  the  consideration  well  emphasized  by  the 
Interstate  Commerce  Commission  of  the  endlessness  and 
futility  of  the  effort  to  follow  every  transaction  to  its  ulti- 
mate result.  Probably  in  the  end  the  public  pays  the 
damages  in  most  cases  of  compensated  torts." 

But  the  Commission  properly  points  out  that  this  atti- 
tude of  the  court  implies  that  the  shipper  has  suffered 
from  extortion,  and  hence  is  entitled  to  his  damages, 
whereas  the  fact  is  that  when  the  carrier  charged  the  rate, 
which  later  the  Commission  decided  was  unreasonable, 
that  rate  was  the  legal  rate,  and  neither  carrier  nor  shipper 
knew  whether  it  would  later  be  held  to  be  unreasonable. 
Determination  by  the  Commission  that  the  rate  was  un- 
reasonable constituted  a  finding  that  the  carrier  had  com- 
mitted a  public  wrong  from  which  it  should  not  be  per- 
mitted to  benefit,  but  it  was  not  necessarily  an  evidence 
of  private  damage  for  which  the  shipper  was  entitled  to 

1 230  U.  S.,  184  (1913).  *  245  U.  S.,  531  (1918). 


252  RAILROADS   AND   GOVERNMENT 

recover.  With  this  in  mind,  the  Commission  has  recom- 
mended that  the  law  affirmatively  recognize  that  in  cases 
of  unreasonable  rates  private  damage  does  not  necessarily 
follow  a  violation  of  the  act,  and  that  the  damage  sec- 
tions be  so  construed  that  no  person  shall  be  entitled  to 
reparation  except  to  the  extent  that  he  can  show  damage.1 
With  this  the  Commission  has  linked  the  proposal  that 
its  function  shall  be  confined  to  the  finding  of  an  un- 
reasonable rate  as  of  a  particular  time,  and  that  the 
award  of  reparation  be  placed  wholly  in  the  courts,  thus 
relieving  the  Commission  of  an  enormous  task  somewhat 
alien  to  its  proper  functions. 

From  the  standpoint  of  mere  bookkeeping,  there  are 
objections  to  the  reimbursement  plan  of  the  Act  in  the 
mass  of  detailed  accounting  and  the  consequent  expense 
involved.  One  has  only  to  recall  the  experience  of  the 
Consolidated  Gas  Company  in  New  York  City,  after 
the  adverse  decision  of  the  Supreme  Court  in  1909 — the 
enormous  labor  involved  in  the  process  of  refunding  pay- 
ments and  the  many  inequalities  that  arose  through  in- 
ability to  locate  patrons — to  realize  what  a  tremendous 
job  the  law  has  given  to  the  carriers. 

At  the  very  beginning  in  1910  the  proposal  of  the  "in- 
surgents" should  have  been  adopted,  that  rates  should 
not  go  into  effect  without  the  previous  approval  of  the 
Commission.  Now  that  the  Commission  is  better  or- 
ganized, there  is  far  less  reason  for  refusal  to  adopt  this 
plan  than  there  was  then.  If  the  burden  is  on  the  carrier 
to  show  that  the  increased  rate  is  reasonable,  there  is  no 
reason  why  this  demonstration  should  not  be  made  to 
the  satisfaction  of  the  Commission  before  the  rate  goes 

1  Annual  Report,  1920,  page  78.  This  is  a  change  in  the  Commis- 
sion's attitude.  In  1908  (13  I.  C.  C.,  680)  the  Commission  said: 
"If  complainants  were  obliged  to  follow  every  transaction  to  its  ulti- 
mate result  and  to  trace  out  the  exact  commercial  effect  of  the  freight 
rate  paid,  it  would  never  be  possible  to  show  damages  with  sufficient 
accuracy  to  justify  giving  them," 


THE   PROBLEM  OF  RATES  253 

into  effect.     Such  was  the  underlying  purpose  of  the  Act 
of  August  1917,  which  expired  by  limitation  on  January 

I,  I92O.1 

2.     Long  and  Short  Haul 

The*amendment  of  Section  4,  the  long  and  short  haul 
clause,  was  a  gratifying  indorsement  of  the  constructive 
work  of  the  Commission  during  the  previous  decade. 
For  the  new  legislation  did  no  more  than  to  put  into 
statutory  form  the  rules  of  procedure  upon  which  the 
Commission  had  repeatedly  acted  in  specific  cases.  The 
amendment  provided  that  (i)  the  Commission  should  not 
permit  a  charge  to  or  from  a  more  distant  point  that  was 
not  reasonably  compensatory  for  the  service  performed; 

(2)  if  a  circuitous  route  was  permitted  to  meet  the  charge 
of  the  direct  route,  intermediate  points  on  the  circuitous 
route,  which  were  at  no  greater  distance  from  points  of 
origin  than  the  length  of  the  direct  route,  could  not  be 
charged  higher  rates  than  the  direct  route  was  charging; 

(3)  potential  water  competition  was  not  a  sufficient  ground 
for  relief  from  the  operation  of  the  clause.     All  of  these 
principles  had  been  for  several  years  the  basis  of  Com- 
mission decision  and   the  instruments   with   which   the 
anomalous  situation  in  the  Southeast  was  being  gradually 
adjusted.     Reasonably  compensatory  rates  at  terminal 
points  had  to  be  assured  before  the  Commission  would 
listen  to  the  carrier's  prayer  for  relief.     The  extent  to 
which  circuity  of  route  should  be  recognized  as  a  justifiable 
ground  for  relief  had  been  determined  by  the  Commission 
soon  after  1910,  and  the  establishment  of  reasonable  in- 
termediate rates  had  been  required  as  a  preliminary  to 
any  concession.     Moreover,   for  several  years  pleas  of 

1See  p.  13.  That  this  would  lighten  rather  than  increase  the  bur- 
dens of  the  Commission  is  evident  when  we  consider  that  reparation 
awarded  by  the  Commission  in  1920  amounted  to  $878,000,  and  that 
the  amount  for  1921  will  be  larger. 


254  RAILROADS  AND   GOVERNMENT 

potential  water  competition  had  fallen  upon  deaf  ears.1 
In  an  extended  investigation  of  the  Mississippi  River 
situation  in  December  1919,  it  was  denied  that  river 
competition  was  any  longer  of  a  character  to  justify  the 
continuance  of  the  lower  rates  at  river  points  than  at  in- 
termediate points,  and  all  relief  previously  granted  with 
respect  to  rates  between  the  main  river  cities  was  with- 
drawn.2 As  was  pointed  out  earlier,  no  effective  water 
competition  had  for  a  quarter  of  a  century  been  present 
in  the  Mississippi  Valley.  At  the  time  of  this  investi- 
gation, in  1919,  there  was  nothing  operating  on  the  Mis- 
sissippi in  through  traffic  except  five  towboats  and  a  few 
barges  owned  by  the  United  States  Railroad  Administra- 
tion. There  was  nothing  at  all  on  the  Missouri  River, 
and  in  local  business  between  river  cities  only  a  weekly 
service.  While  there  seemed  to  be  much  anticipation  of 
development  of  water  transportation  in  the  valley,  and 
while  many  cities  were  contemplating  water-front  im- 
provements, there  was  no  indication  that  private  capital 
was  interested.  Any  growth  in  water  facilities  was  to  be 
in  Government-owned  vessels. 

The  effect  of  the  decision  here  referred  to  was  wide- 
spread. It  restored  rates  throughout  the  Mississippi 
Valley  to  a  basis  consistent  with  the  4th  Section,  and 
thereby  affected  rates  to  all  parts  of  the  United  States. 
It  is  the  most  significant  action  thus  far  taken  to  bring 
the  transportation  situation  in  the  Southeast  into  har- 
mony with  the  fundamental  principles  of  interstate  com- 
merce law.  Rivers  and  brooks  that  never  served  any 
useful  transportation  purpose  beyond  that  of  furnishing 
the  railroads  with  plausible  arguments  against  Commis- 
sion rulings  can  now  be  returned  to  their  placid  solitude 
from  which  they  were  dragged  in  the  early  years  of  the 
long  and  short  haul  controversy.3 

1  53  I.  C.  C,  295  (April,  1919).  *  55  I.  C.  C.,  515. 

*  A  proposed  readjustment  of  class  and  commodity  rates  in  this  ter- 
ritory was  submitted  by  the  railroads,  but  was  in  large  part  disapproved 


THE  PROBLEM  OF  RATES  255 

3.    Minimum  Rates 

It  is  an  interesting  instance  of  the  persistence  of  the 
competitive  theory  of  railroad  rates  that  not  until  1920 
was  the  Commission  given  power  to  prescribe  minimum 
rates,  although  in  its  earliest  reports  it  had  pointed  out 
clearly  the  consequences  of  this  lack  of  authority.1  It 
was  the  general  assumption  that  the  Commission  was 
established  to  protect  the  public  against  excessive  rates, 
that  the  self-interest  of  the  railroads  could  be  trusted  to 
take  care  that  rates  were  not  too  low,  and  that  in  any 
case,  if  they  proved  to  be  too  low,  it  was  the  railroad  that 
suffered  and  not  the  public.  This  theory  was  allied  with 
the  familiar  one  that  the  more  railroads  a  community 
had,  the  greater  the  competition  and  the  more  advan- 
tageous the  rates  to  the  public,  a  theory  which  many  a 
community  has  found,  to  its  sorrow,  does  not  work  out 
satisfactorily  in  practice.  But  more  than  this,  leaving 
the  lower  end  of  the  rate  scale  to  be  manipulated  at  will 
by  the  railroad  means  a  failure  altogether  to  recognize  the 
public  nature  of  the  industry,  and  the  fundamental  legal 
principle  that  this  agency  must  offer  to  every  locality  and 
every  commodity  rates  that  are  just  and  reasonable  and 
not  unfairly  discriminating.  To  permit  a  railroad  to  pre- 
scribe any  rate  it  chooses  provided  it  does  not  exceed  a 
certain  maximum  puts  an  unrestricted  power  of  unfair 
discrimination  into  its  hands.  It  may  for  any  reason 
it  sees  fit  give  so  low  a  rate  to  a  particular  commodity 
that  this  commodity  does  not  contribute  its  fair  share  of 
revenue  to  the  railroad  treasury,  thus  imposing  an  un- 
reasonable burden  upon  all  traffic  not  so  favored.  The 

by  the  Commission  (64  I.  C.  C.,  107,  306,  October  10  and  November 
15,  1921).     The  Commission's  disapproval  was  based  upon  the  fact 
that  carriers  had  removed  discriminations  against  interior  points  by  ad- 
vancing materially  the  rates  to  the  water  points. 
1  Annual  Report,  1893,  page  38. 


256  RAILROADS  AND  GOVERNMENT 

only  restraint  upon  the  carrier  is  that  the  rate  must  be 
publicly  filed  in  accord  with  legal  requirements.  There 
are  multitudes  of  instances  of  this  abuse  in  railroad  tariffs. 
No  power  resided  in  the  Commission  to  interfere. 

Again,  there  was  nothing  to  prevent  any  restless  car- 
rier, which  thought  thereby  to  serve  its  own  selfish  ends, 
from  upsetting  an  established  rate  structure  by  unwise 
and  unreasonable  reductions  of  competitive  rates.  Com- 
peting carriers  could  not  do  otherwise  than  follow  suit, 
however  reluctantly.  Competition  at  terminal  points 
or  at  common  markets  among  commodities  originating  in 
various  producing  sections  led  often  to  the  granting  of 
unreasonably  low  rates  at  the  expense  of  non-competitive 
points.  So  far  as  these  cases  could  be  brought  under 
the  long  and  short  haul  section,  that  is,  so  far  as  the 
discrimination  against  the  short-haul  point  and  in  favor 
of  the  long-haul  competitive  point  involved  a  like  kind  of 
property  over  the  same  line,  the  situation  since  the 
amendment  of  1910  had  been  within  the  control  of  the 
Commission,  and  the  Commission,  as  evidenced  in  the 
transcontinental  cases,  had  not  only  determined  whether 
the  competitive  rate  could  be  lower  than  the  intermediate 
rate,  but  had  actually  established  the  differential  be- 
tween them,  and  this  without  any  statutory  authority 
to  prescribe  a  minimum.  But  there  are  many  instances 
which  do  not  violate  the  long  and  short  haul  principle, 
and  yet  discriminate  in  favor  of  the  competitive  point 
to  such  a  degree  as  to  throw  an  undue  burden  upon  all 
interior  points  that  are  paying  non-competitive  rates. 
When  a  railroad  undertakes  to  put  a  producing  section 
that  it  serves  into  a  market  in  which  other  producing 
sections  served  by  other  railroads  are  competing,  and  in 
order  to  do  this  grants  a  rate  that  is  unreasonably  low 
for  the  service  performed,  the  achievement  is  to  a  de- 
gree financed  by  all  the  places  along  that  railroad  that 
do  not  enjoy  the  competitive  advantage.  The  dropping 


THE  PROBLEM   OF  RATES  257 

of  the  rate  by  one  railroad  in  the  interest  of  the  pro- 
ducers that  it  serves  simply  results  in  a  lowering  of  the 
rate  by  the  competing  carrier  at  the  behest  of  its  pa- 
trons. There  was  no  stopping-point  in  law.  The  Com- 
mission was  helpless.  And  it  not  only  meant  injustice 
to  other  shippers  and  places  and  commodities,  but  it 
meant  an  instability  of  rates  that  was  not  in  the  public 
interest.  The  old-fashioned  rate  war  was  pretty  thor- 
oughly discouraged  by  regulations  governing  the  filing 
and  alteration  of  rates,  but  there  was  still  opportunity 
for  a  considerable  disturbance  of  the  rate  structure  in 
times  of  light  traffic,  which  could  only  be  removed  by 
the  power  to  prescribe  a  minimum. 

In  the  Act  of  1920  this  power  to  prescribe  a  minimum 
rate  has  been  added  to  the  power  already  possessed  to 
prescribe  a  maximum.1  It  is  evident  that  this  clears  up 
once  for  all  the  question  of  the  authority  of  the  Com- 
mission to  prescribe  a  differential  between  long  and  short 
haul  rates,  a  power  which  the  Supreme  Court  held  the 
Commission  already  to  possess,  but  which  now  has  the 
sanction  of  a  statute.  Again,  it  evidently  puts  into  the 
hands  of  the  Commission  the  power  to  prescribe  an  abso- 
lute rate,  a  power  which  Congress  in  the  past  has  been 
loath  to  grant,  and  which  many  have  believed  to  be  un- 
constitutional. However,  in  view  of  the  precision  with 
which  Congress  has  defined  the  limits  of  administrative 
discretion  in  the  various  sections  of  the  Act  to  Regulate 
Commerce,  there  is  little  danger  that  this  added  au- 
thority will  be  abused.  It  is  one  further  step  in  the 
establishment  of  efficient  regulation  by  administrative 
agency. 

1  Sees.  6,  13,  15. 


CHAPTER  XVIII 

THE  CONFLICT  OF  JURISDICTION,  STATE  AND  INTERSTATE 

THE  conflict  of  state  and  nation  over  the  limits  of 
their  respective  jurisdictions  is  as  old  as  the  Constitu- 
tion, and  need  not  be  reviewed  here.  Even  in  its  more 
recent  application  to  railroad  problems,  it  is  no  new  ques- 
tion. In  the  Wisconsin  application  of  the  Granger 
cases1  decided  in  1876,  when  interstate  transportation 
was  just  beginning  to  assume  large  proportions,  the  Su- 
preme Court  of  the  United  States  said:  "Until  Congress 
undertakes  to  legislate  for  those  who  are  without  the 
state,  Wisconsin  may  provide  for  those  within,  even 
though  it  may  indirectly  affect  those  without."  But 
this  was  not  allowed  to  stand  long  without  modification, 
or  at  least  elucidation,  for  in  the  Wabash  Case2  ten 
years  later  the  court,  in  a  divided  opinion,  specifically 
limited  the  authority  of  the  state  to  commerce  within 
its  borders.  "It  cannot  be  too  strongly  insisted  upon," 
said  the  opinion,  "that  the  right  of  continuous  transpor- 
tation from  one  end  of  the  country  to  the  other  is  essen- 
tial in  modern  times  to  that  freedom  of  commerce  from 
the  restraints  which  the  state  might  choose  to  impose 
upon  it,  that  the  commerce  clause  was  intended  to  se- 
cure." 

Somewhat  slowly  and  haltingly,  but  always  in  the 
same  direction,  public  opinion  and  court  decision  moved. 
There  was  a  gradual  tightening  of  the  federal  grip  upon 
the  entire  transportation  system.  One  of  its  most  in- 
teresting recent  manifestations  has  appeared  in  con- 

i  Peik  v.  C.  &  N.  W.  Ry.,  94  U.  S.,  164. 
'Wabash  v.  Illinois,  118  U.  S.,  557  (1886). 

258 


CONFLICT  OF  JURISDICTION,  STATE  AND  INTERSTATE      259 

nection  with  safety-appliance  legislation.  The  facts  in 
these  cases  are  typical  of  railroad  relationships  every- 
where. Cars  operating  in  interstate  and  intra-state  traf- 
fic are  indiscriminately  mixed  in  the  same  train  and 
the  same  employees  handle  both.  To  rob  Congress 
of  the  power  to  control  the  safety  equipment  on  cars 
operating  in  intra-state  traffic  defeats  the  very  purpose 
of  the  federal  law.1  However,  this  applied  to  safety 
provisions  only,  and  might  be  regarded  as  a  manifes- 
tation of  federal  police  power  in  the  interest  of  the  en- 
tire people.  It  remained  for  the  Minnesota  and  Shreve- 
port  Cases  to  establish  federal  supremacy  in  the  field 
of  rate  making.  To  be  sure,  in  the  former  of  these  cases2 
the  power  of  the  State  of  Minnesota  was  left  undis- 
turbed, even  though  the  evidence  disclosed  multitudes  of 
instances  in  which  the  orders  of  the  Minnesota  legisla- 
ture and  Commission  had  compelled  adjustment  of  inter- 
state rates  to  meet  the  competition  of  the  newly  estab- 
lished state  charges.  But  this  interference  was  held 
by  the  court  to  belong  to  that  class  of  powers  which  the 
state  was  at  liberty  to  exercise  in  the  absence  of  the 
assertion  of  federal  authority.  The  issue  had  been  tried 
out  in  the  courts  without  recourse  to  the  tribunal  set 
up  by  Congress  for  the  determination  of  questions  of 
discrimination  and  preference — the  Interstate  Commerce 
Commission — and  hence  the  law  of  the  state  was  in 
full  force.  Justice  Hughes  anticipated  the  legislation  of 
1920  when  he  said:  "If  the  situation  has  become  such, 
by  reason  of  the  interblending  of  the  interstate  and  the 
intra-state  operations  of  interstate  carriers,  that  ade- 
quate regulation  of  their  interstate  rates  cannot  be  main- 
tained without  imposing  requirements  with  respect 
to  their  intra-state  rates  which  substantially  affect  the 
former,  it  is  for  Congress  to  determine  within  the  limits 
of  its  constitutional  authority  over  interstate  commerce 
1 222  U.  S.,  20  (1911).  2  230  U.  S.,  352  (1913). 


260  RAILROADS   AND   GOVERNMENT 

and  its  instruments  the  measure  of  the  regulation  it 
should  supply." 

The  Shreveport  Cases1  brought  the  issue  definitely  to 
a  head.  In  conformity  with  a  policy  deliberately  pur- 
sued by  the  Texas  Commission  to  allocate  Texas  markets 
to  Texas  jobbers  and  manufacturers,  the  commercial 
interests  of  Shreveport,  Louisiana,  just  outside  the  State 
of  Texas,  had  been  seriously  discriminated  against.  For 
example,  the  rate  that  would  carry  first-class  traffic  in- 
tra-state  160  miles  eastward  from  Dallas  on  the  line  of 
the  Texas  and  Pacific,  would  carry  the  same  class  of 
traffic  interstate  only  55  miles  westward  from  Shreve- 
port on  the  same  line.  A  rate  of  50  cents  per  hundred 
pounds  would  carry  traffic  northward  from  Houston  on 
the  line  of  the  Houston  East  and  West  Texas  a  distance 
of  118  miles.  This  destination  was  only  112  miles  south 
of  Shreveport  and  yet  the  rate  from  Shreveport  was 
69  cents.  These  two  instances  are  typical  of  a  general 
policy  of  rate  adjustment.  The  Supreme  Court,  sus- 
taining the  Interstate  Commerce  Commission,  found  an 
unlawful  discrimination  to  exist  under  Section  3  of  the 
Interstate  Commerce  Act,  which  forbids  any  undue  or 
unreasonable  preference  or  advantage.  It  likewise  sus- 
tained the  Commission  in  finding  that  the  interstate 
rates  were  reasonable  and  that  the  discrimination  must 
be  removed.  The  discrimination  was  evident  and  was 
direct.  It  arose  out  of  the  rates  prescribed  by  a  single 
carrier  for  shipments  under  similar  circumstances  over 
its  line.  The  Commission  having  ordered  this  discrimi- 
nation removed,  and  having  found  that  the  interstate 
rate  was  not  unreasonably  high,  there  was  no  option  on 
the  part  of  the  carrier  except  to  disregard  the  order  of 
the  state  commission  and  remove  the  discrimination 
by  raising  the  intra-state  rate.  It  was  this  action  that 

1  Houston  East  and  West  Texas  Ry.  v.  U.  S.  and  Texas  and  Pacific 
Ry.  v.  U.  S.,  234  U.  S.,  342  (1914):  23  I.  C.  C.,  31  (1912). 


CONFLICT  OF  JURISDICTION,  STATE  AND  INTERSTATE      2t)I 

was  contemplated  by  the  Supreme  Court  decision.     To 
quote  from  the  opinion  of  Justice  Hughes: 

"Wherever  the  interstate  and  intra-state  transactions 
of  carriers  are  so  related  that  the  government  of  the  one 
involves  the  control  of  the  other,  it  is  Congress,  and  not 
the  state,  that  is  entitled  to  prescribe  the  final  and  domi- 
nant rule.  ...  It  is  for  Congress  to  supply  the  needed 
correction.  ...  So  far  as  these  interstate  rates  con- 
formed to  what  was  found  to  be  reasonable  by  the  Com- 
mission, the  carriers  are  entitled  to  maintain  them,  and 
they  are  free  to  comply  with  the  order  by  so  adjusting 
the  other  rates  to  which  the  order  relates  as  to  remove 
the  forbidden  discrimination.  But  this  result  they  are 
required  to  accomplish" 

In  1918  the  Commission  reviewed  its  opinion1  at  the 
intervention  of  shippers  who  contended  that  its  order 
went  beyond  the  necessities  of  the  case.  They  conceded 
that  the  Commission  could  fix  rates  between  Shreve- 
port  and  Texas  points,  but  they  said  the  federal  author- 
ity cannot  displace  Texas  rates  and  classifications  "ex- 
cept within  the  territory  that  is  substantially  tributary 
to  Shreveport."  However,  the  Commission  declined  to 
modify  its  ruling,  on  the  ground  that  the  area  in  Texas 
from  and  to  which  Shreveport  might  reasonably  expect 
to  ship  freight  embraced  the  entire  state. 

It  is  unnecessary  to  follow  the  later  opinions  sustaining 
this  doctrine.2  They  all  culminated  in  the  legislation 

1 48  I.  C.  C,  312. 

1  In  its  report  for  1916  (page  89)  the  Commission  stated  that  following 
the  opinion  in  the  Shreveport  Case,  it  had  already  decided  over  fifty 
similar  cases.  In  Business  Men's  League  of  St.  Louis  v.  A.  T.  and 
S.  F.  Ry.  it  practically  wiped  out  the  Illinois  two-cent  passenger  law. 
41  I.  C.  C.,  13  (1916);  49  I.  C.  C.,  713  (1918).  245  U.  S.,  493  (1918). 
The  doctrine  has  also  had  application  to  express  rates  in  a  South  Da- 
kota case.  244  U.  S.,  617  (1917). 


262  RAILROADS  AND   GOVERNMENT 

of  1920,  in  which  Congress  put  its  seal  of  approval  on 
the  interpretation  of  the  court  by  making  it  the  law  of 
the  land.  It  is  provided,  by  an  amendment  of  Section 
13,  that  whenever  the  Interstate  Commerce  Commis- 
sion, after  full  hearing,  finds  that  any  rate  or  regulation 
imposed  by  authority  of  a  state  causes  any  undue  or 
unreasonable  advantage  or  preference  or  prejudice  as 
between  persons  or  localities  in  intra-state  commerce 
and  those  in  interstate  commerce,  or  causes  unjust  dis- 
crimination against  interstate  commerce,  all  of  which 
is  declared  unlawful,  the  Interstate  Commerce  Com- 
mission shall  prescribe  the  rate  thereafter  to  be  charged 
that  will  remove  the  discrimination  or  preference,  and 
such  rate  must  be  observed  by  the  carrier,  "the  law  of 
any  state  or  the  decision  or  order  of  any  state  authority 
to  the  contrary  notwithstanding."  The  Interstate  Com- 
merce Commission  is  authorized,  but  is  not  required,  to 
confer  with  the  state  authorities  with  respect  to  rate 
relationships,  to  hold  joint  hearings  with  them,  and  to 
avail  itself  of  the  co-operation,  services,  records,  and 
facilities  of  the  state  authorities,1  but  the  only  mandate 
imposed  upon  the  federal  body  is  to  notify  any  interested 
state  of  any  proceeding  contemplated  by  the  Commis- 
sion. 

This  would  appear  to  be  a  power  sufficiently  sweeping 
to  satisfy  the  most  ardent  nationalist.  Yet  the  inter- 
pretation of  this  clause,  which  the  Commission  was  com- 
pelled to  set  up  almost  immediately  upon  the  passage  of 
the  Act,  has  extended  the  scope  of  federal  jurisdiction 
beyond  what  many  at  least  must  have  considered  its 
limits  at  the  time  the  section  was  enacted.  This  latest 

1 A  practice  of  holding  joint  hearings  had  grown  during  the  years 
immediately  preceding  the  war,  and  both  the  Interstate  Commerce 
Commission  and  the  National  Association  of  Railway  and  Utilities 
Commissioners  had  urged  Congress  to  grant  the  statutory  authority 
necessary  to  make  co-operation  effective. 


CONFLICT  OF  JURISDICTION,   STATE  AND   INTERSTATE      263 

development  calls  for  analysis,  because  if  the  position  of 
the  Commission  is  sustained  by  the  Supreme  Court,  it 
will  go  far  toward  depriving  the  states  of  any  effective 
rate-making  authority.  It  will  be  recalled  that  during 
the  war  period  the  powers  of  the  states  were  set  aside  or 
disregarded  as  far  as  was  necessary  to  effect  the  purposes 
of  federal  operation,  and  that  this  situation  was  approved 
by  the  Supreme  Court. 

The  Transportation  Act  of  1920  provided  for  a  con- 
tinuance of  the  federal  guarantee  of  income  for  six 
months  from  March  i,  and  stipulated  in  connection 
therewith,  and  as  an  obvious  corollary,  that  prior  to  the 
end  of  this  guarantee  period  no  rate  should  be  reduced 
without  the  approval  of  the  Interstate  Commerce  Com- 
mission. The  removal  of  this  injunction  upon  state  ac- 
tion was  virtually  coincident  with  the  application  of  the 
increased  rates  granted  by  the  Interstate  Commerce 
Commission,  which  were  promulgated  in  conformity  with 
the  congressional  mandate  instructing  the  Commission 
to  prescribe  rates  that  would  yield  the  statutory  return. 
In  making  its  estimates  as  to  what  the  rates  should  be, 
the  Commission  had  not  differentiated  between  inter- 
state and  intra-state  traffic,  but  had  taken  the  country 
as  a  whole,  divided  it  into  territorial  groups,  and  pre- 
scribed rates  for  each  group  that  would  give  an  aggregate 
return  of  6  per  cent  upon  the  aggregate  value  of  the  rail- 
road investment.  It  should  be  noted,  however,  that 
three  state  railroad  commissioners  selected  by  the  Na- 
tional Association  of  Railway  and  Utilities  Commis- 
sioners as  its  representatives  sat  throughout  the  hearings 
and  conferences,  concurred  in  the  conclusions  reached, 
and  issued  a  statement  to  state  commissions  throughout 
the  country  to  that  effect.  Following  the  authorization 
of  increases  by  the  federal  commission,  the  railroad  com- 
panies made  formal  application  to  state  authorities  for 
permission  to  file  schedules  applicable  to  state  traffic, 


264  RAILROADS  AND   GOVERNMENT 

corresponding  with  the  increased  rates  authorized  for  in- 
terstate traffic.  Many  of  the  states  granted  the  petitions 
without  reservation,  but  many  granted  them  only  in 
part,  and  some  denied  them  altogether.  In  most  instances 
the  increases  in  freight  rates  were  approved.  Most  of 
the  denials  were  in  connection  with  passenger  fares  that 
had  been  prescribed  by  state  legislatures,  over  which 
the  state  regulating  authorities  held  that  they  possessed 
no  jurisdiction. 

The  first  cases  decided  by  the  Commission,  those  of 
New  York  and  Illinois  in  November,  1920^  laid  down 
the  principles  followed  in  all  succeeding  cases.  The  Com- 
mission rejected  the  argument  that  its  jurisdiction  over 
intra-state  commerce  was  confined  to  instances  where 
discrimination  existed  affecting  particular  persons  and 
localities,  and  insisted  that  the  question  at  issue  was 
whether  interstate  commerce  had  been  injuriously  af- 
fected. Congress  directed  that  the  Commission  allow 
rates  that  would  yield  5^2  or  6  per  cent  upon  the  ag- 
gregate property  value  in  each  rate  group,  and  the  power 
of  Congress  could  not  be  denied  on  the  ground  that  ag- 
gregate revenue  was  a  commingling  of  interstate  and 
intra-state  revenue.  New  York  by  its  refusal  to  increase 
passenger  and  milk  rates  had  deprived  the  railroads  of 
nearly  $12,000,000  annually,  and  to  that  extent  had  de- 
feated the  declared  purpose  of  Congress.  To  be  sure, 
the  decision  pointed  out  many  cases  of  preference  in  pas- 
senger fares  and  milk  rates  between  railroads  operating 
exclusively  within  the  state  and  competitors  operating 
interstate,  and  showed  how  state  authorities  were  en- 
abled to  regulate  interstate  charges  by  controlling  com- 
petitive intra-state  charges.  This  is  an  old  story  rendered 
familiar  by  the  Minnesota  and  Shreveport  Cases.  But 
the  significant  fact  is  that  these  discriminations  were 
considered  as  only  a  portion  of  the  indictment.  State 
1 59  I.  C.  C.f  290,  350. 


CONFLICT  OF  JURISDICTION,   STATE  AND   INTERSTATE      265 

regulation  injuriously  affected  interstate  commerce,  not 
primarily  because  specific  discriminations  prevailed  here 
and  there,  but  because  carriers  had  been  deprived  of  a 
certain  amount  of  revenue  which  the  Commission,  under 
a  mandate  of  Congress,  had  determined  to  be  neces- 
sary in  order  that  the  carriers  should  earn  a  fair  return. 
This  advanced  position  taken  by  the  Commission  is  un- 
equivocally stated  in  the  Illinois  Case.  "It  was  stated 
on  argument  that  about  thirty-one  states  had  permitted 
the  same  increases  in  fares  as  we  fixed  in  Increased  Rates, 
1920.  Are  the  transportation  facilities  of  these  states 
and  of  the  nation  to  be  put  in  jeopardy  by  reason  of  the 
failure  of  the  other  states  to  conform  to  the  plan  adopted 
by  the  Congress  for  the  welfare  of  the  nation  as  a  whole  ? 
The  states  gave  to  Congress  the  power  to  protect  and 
promote  the  instrumentalities  of  interstate  commerce, 
and  as  the  states'  right  they  look  to  Congress  to  exercise 
that  power."  Again,  in  the  Nebraska  Case,1  it  called 
attention  to  the  fact  that  "differences  in  judgment  as 
among  the  several  state  commissions,  if  each  could  and 
would  create  a  rate  group  of  its  own,  would  obviously 
nullify  the  fundamental  purposes  of  the  Transportation 
Act."  This  answers  the  query  that  naturally  arises  in 
one's  mind  as  to  how  the  Commission's  position  is  to  be 
harmonized  with  Section  i  of  the  Act  which  confers  con- 
trol over  intra-state  commerce  exclusively  upon  the  states. 
Interference  is  not  in  the  matter  of  specific  rates,  but 
rather  in  that  of  financial  policy.  It  is  no  longer  a  ques- 
tion of  discrimination.  It  is  one  of  revenue.  Here  lies 
the  overwhelming  significance  of  these  decisions.2 

The  most  serious  instances  of  the  burdening  of  inter- 
state operation  by  state  action  are  likely  to  result  where 

» 60  I.  C.  C.,  305  (1921). 

J  Senator  Cummins,  chairman  of  the  Senate  Committee  on  Interstate 
Commerce,  is  quoted  by  the  press  as  saying  (Nov.  23,  1921)  that  Con- 
gress never  intended  to  grant  authority  to  the  Interstate  Commerce 
Commission  to  change  an  intra-state  rate  on  the  ground  that  such  rate 


2d6  RAILROADS  AND   GOVERNMENT 

the  general  level  of  state  rates  is  out  of  line  with  com- 
parable interstate  rates.  In  Smyth  v.  Ames  the  Supreme 
Court  held  that  the  reasonableness  of  a  schedule  of  intra- 
state  rates  prescribed  by  the  State  of  Nebraska  must  be 
determined  by  itself,  that  the  argument  that  the  railroad 
is  an  entirety,  that  its  income  goes  into  and  its  expenses 
come  out  of  a  common  fund,  has  no  application  when 
the  state  is  without  authority  over  rates  on  the  entire 
line.  In  the  situation  before  us,  conditions  are  reversed. 
The  federal  government  has  assumed  authority  over 
transportation  as  a  whole.  The  railroad  is  an  entirety. 
No  state  may  assume  to  divide  the  authority  so  long  as 
the  matter  is  of  national  concern. 

It  is  not  without  interest  to  observe  that  in  most  cases 
no  evidence  was  submitted  by  carriers  to  state  bodies  and 
no  hearings  were  conducted.  Railroads  brushed  aside  this 
technicality  and  petitioned  the  federal  body  directly  to  en- 
force the  rates  it  had  prescribed.  This  method  of  pro- 
cedure the  Commission  took  cognizance  of  and  commented 
upon  in  the  Arkansas  Case.1  In  response  to  the  insis- 
tence by  the  Arkansas  Corporation  Commission  that  the 
dictates  of  orderly  procedure  and  the  demands  of  sub- 
stantial justice  required  that  resort  should  first  be  had 
to  state  tribunals,  the  Commission  recognized  the  de- 
sirability of  co-operation  between  state  and  interstate 
bodies,  and  admitted  that  the  procedure  of  the  car- 
riers rendered  this  difficult.  "However,"  it  added,  "we 
are  here  confronted  with  practical  questions  for  the  solu- 
tion of  which  Congress  has  provided  a  practical  course 
of  procedure  by  means  of  which  substantial  justice  is 
assured.  Respondents  have  elected  to  pursue  that  course 

was  not  producing  a  proper  share  of  the  total  revenues  of  the  railroad. 
On  the  contrary,  he  insisted,  Congress  specifically  declined  to  give  that 
right,  and  authorized  the  Commission  to  change  an  intra-state  rate  only 
on  the  ground  that  such  rate  discriminated  against  a  person,  a  locality, 
or  an  interstate  rate. 

1  59  I.  C.  C,  471  (December  1920). 


CONFLICT   OF  JURISDICTION,   STATE  AND   INTERSTATE      267 

and  we  are  not  vested  with  appellate  power  under  which 
they  might  be  remanded  to  tribunals  of  the  state." 

Almost  directly  as  a  consequence  of  this  position,  the 
decisions  of  the  Commission,  when  read  one  after  an- 
other, appear  ruthlessly  to  sweep  away  state  rate  struc- 
tures and  substitute  its  own,  without  any  attempt  at 
specific  and  detailed  adjustment.  To  be  sure,  it  invites 
interested  parties,  including  state  authorities,  to  apply 
for  modification  of  its  findings  in  specific  cases  of  lack 
of  adjustment.  But  it  is  a  question  whether  the  law  did 
not  contemplate  a  larger  degree  of  co-operation  with 
state  authorities  and  the  working  out  jointly  of  a  rate 
structure  in  which  each  state  should  in  a  way  agree  to 
assume  its  proper  share  of  the  transportation  burden. 

A  case  now  pending  in  the  Supreme  Court  to  test  the 
powers  of  the  Interstate  Commerce  Commission  is  on 
appeal  from  the  State  of  Wisconsin,1  but  forty-two  states 
have  joined  in  a  brief  as  amid  curies. 

1 59  I.  C.  C,  391  (1920). 


CHAPTER  XIX 

RAILROAD  CONSOLIDATION  AND  FEDERAL  INCORPORATION 

WHATEVER  the  shortcomings  of  federal  operation,  and 
however  unfavorably  it  may  have  appeared  to  affect 
public  opinion  on  the  fundamental  problem  of  national- 
ization, its  influence  has  been  profound  upon  the  legis- 
lation that  followed  the  war.  In  many  ways  the  attempts 
at  unified  operation  were  ineffective,  and  yet  they  instilled 
into  the  public  thinking  the  idea  of  co-operation  and  co- 
ordination which  found  its  way  in  part  into  legislation, 
and  which  is  likely  to  lead  in  the  future  to  still  more  im- 
portant results.  There  was  much  discussion  in  Congress 
concerning  the  various  projects  for  railroad  consolidation, 
both  compulsory  and  voluntary,  and  when  the  bill  went 
to  conference  a  compromise  had  been  reached  under 
which  the  railroads  were  to  have  seven  years  in  which 
to  do  then*  own  consolidating,  at  the  end  of  which  time 
the  Government  was  to  step  in  and  compel  performance. 
This  clause  disappeared  in  the  recesses  of  the  conference 
room  and  the  bill  emerged  with  compulsion  altogether 
eliminated.  What  defeated  the  compulsory  feature  was 
doubtless  an  inability  to  measure  the  consequences,  the 
probability  of  controversy  and  litigation  arising  from  the 
intricacies  of  intercorporate  relationships,  and  an  un- 
willingness to  impose  the  irritating  burden  of  adjustment 
upon  carriers  that  needed  to  concentrate  attention  upon 
operating  problems. 

Consolidation  takes  two  forms  in  the  Act  of  1920, 
which  might  be  designated  as  partial  and  complete.  The 
former  relates  to  applications  for  control  of  one  carrier 
by  another  through  lease  or  stockholding,  or  any  other 

268 


RAILROAD  CONSOLIDATION  269 

device  except  "consolidation  into  a  single  system."  In 
such  cases  the  Commission  is  authorized  after  hearing 
and  after  determining  that  the  proposed  plan  is  in  the 
public  interest  to  approve  the  acquisition  under  such 
terms  and  to  the  extent  that  it  considers  reasonable.1 

Complete  consolidation  is  equivalent  to  merger  or  1 
amalgamation.  It  authorizes  two  or  more  carriers  "to  * 
consolidate  their  properties  into  one  corporation  for  the 
ownership,  management,  and  operation  of  the  properties 
theretofore  in  separate  ownership,  management,  and 
operation."  Such  consolidation  must  be  effected  in  har- 
mony with  a  plan  to  be  drawn  up  by  the  Commission. 
This  plan  must  divide  the  railroads  into  "  a  limited  num- 
ber of  systems"  in  which  competition  is  to  be  preserved 
as  fully  as  possible  and  existing  routes  and  channels  of 
trade  and  commerce  are  to  be  maintained  wherever  prac- 
ticable. Moreover,  these  systems  are  to  be  so  constructed 
that  while  employing  uniform  charges  they  can  earn  a 
rate  of  net  return  which  is  substantially  the  same  upon 
the  value  of  their  respective  properties.  This  plan  when 
completed  is  to  be  made  public,  hearings  are  to  be  con- 
ducted, of  which  the  Governor  of  each  state  concerned 
is  to  be  given  notice,  and  at  their  conclusion  the  Com- 
mission is  formally  to  adopt  its  plan  of  consolidation. 
Its  efficacy  consists  in  the  fact  that  any  consolidation 
that  takes  place  must  be  in  harmony  with  this  official 
scheme. 

Formal  application  for  permission  to  consolidate  must 
be  presented  to  the  Commission  and  a  hearing  appointed 

1  Although  not  specifically  so  stated,  this  power  to  approve  leases 
and  stock  purchases  would  seem  to  be  exclusive  and  to  supersede  the 
power  of  the  states.  The  clause  in  this  same  section  which  exempts 
carriers  from  the  operation  of  the  anti-trust  laws  so  far  as  is  necessary 
applies  to  all  powers  covered  by  the  section,  including  the  power  here 
referred  to.  It  is  a  fair  inference  that  such  exemption  would  not  have 
been  granted  had  not  the  powers  thereby  released  been  under  the  ex- 
clusive control  of  the  federal  commission. 


270  RAILROADS  AND  GOVERNMENT 

to  which  the  Governors  of  the  states  interested  must  be 
invited.  If  the  Commission  finds  that  the  public  interest 
will  be  promoted  by  the  consolidation,  it  may  approve 
the  application  under  such  terms  as  it  chooses  to  pre- 
scribe, and  the  order  becomes  effective  "the  law  of  any 
state  or  the  decision  or  order  of  any  state  authority  to 
the  contrary  notwithstanding."  The  order  of  the  Com- 
mission with  respect  to  consolidations,  either  partial  or 
complete,  automatically  relieves  the  carriers  from  the 
operation  of  the  anti-trust  laws  so  far  as  may  be  neces- 
sary to  enable  them  to  carry  out  the  order  of  the  Com- 
mission. It  is  further  provided  that  the  Commission 
shall  proceed  under  the  Valuation  Act  to  value  the  prop- 
erties which  it  is  proposed  to  consolidate,  and  that  the 
bonds  and  stock  at  par  of  the  corporate  owner  of  the  con- 
solidated properties  shall  not  exceed  the  value  of  these 
properties  as  ascertained  by  the  Commission. 

A  bare  recital  of  the  Act  makes  sufficiently  clear  the 
very  considerable  and  wholly  unprecedented  power 
granted  to  the  Commission,  a  power  of  which  it  has  as- 
sumed the  exercise  without  delay.  A  plan  for  the  com- 
plete consolidation  of  the  railroads  into  nineteen  systems 
has  been  prepared  at  the  request  of  the  Commission  by 
Professor  William  Z.  Ripley.  This  scheme  has  been 
revised  by  the  Commission  and  presented  as  a  tentative 
plan1  upon  which  hearings  are  to  be  held  in  compliance 
with  the  statute.  To  keep  within  the  limits  imposed  by 
the  statute,  and  to  turn  out  a  model  system  such  as  the 
law  contemplates,  is  by  no  means  a  light  task.  In  the 
first  place  competition  is  to  be  preserved  and  existing 
channels  of  trade  and  commerce  maintained.  This  means 


1  Consolidation  of  railroads.  63  I.  C.  C.,  455  (August  1921).  The 
alterations  from  the  Ripley  plan  have  been  made  with  the  object  of 
minimizing  the  dismemberment  of  existing  systems.  The  project  has 
appeared  too  late  to  permit  of  exhaustive  analysis  in  this  volume. 
The  outline  of  the  Commission  plan  is  printed  as  an  appendix,  page  371. 


RAILROAD  CONSOLIDATION  271 

that  the  railroads  are  not  to  be  consolidated  into  terri- 
torial groups,  but  that  branches,  feeders,  and  paralleling 
roads  are  to  be  combined  in  such  a  way  as  to  create  larger 
systems  without  destroying  or  disturbing  the  general  trend 
of  traffic  or  prevailing  competition.  Combinations  are  to 
be  on  an  economic  rather  than  a  geographic  basis. 

Competition  is  to  be  preserved,  but  it  is  to  be  compe- 
tition in  service  rather  than  competition  in  rates.  For 
it  is  specifically  provided  that  the  systems  are  to  be  so 
constructed  that  with  uniform  rates  they  can  earn  the 
same  rate  of  return  upon  their  property  values.  Whether 
the  Commission  will  be  able  to  arrange  these  systems 
so  that  their  earnings  and  their  costs  under  efficient 
management  will  give  them  the  same  rate  of  net  return 
must  await  the  careful  analysis  of  the  Commission's 
plan.  Yet  indications  point  to  a  reasonably  successful 
outcome.  Mr.  John  E.  Oldham,  a  Boston  banker,  pre- 
pared and  submitted  to  congressional  committees  a  con- 
solidation plan1  quite  in  harmony  with  the  provisions 
of  the  statute  just  referred  to.  This  analysis  demon- 
strated what  was  already  well  understood,  that  consoli- 
dation in  its  broader  and  less  exact  sense  had  already 
proceeded  apace.  Stimulated  by  the  decisions  of  the 
courts  in  1897  and  1898  which  forbade  traffic  agreements, 
by  the  optimism  of  the  investing  public  during  this 
trust-forming  era  and  the  resulting  opportunities  for 
promoter's  profits,  a  great  variety  of  combinations  had 
been  effected,  and  it  was  not  until  the  decision  in  the 
Northern  Securities  Case  in  1904  that  this  movement 
received  its  setback.  Basing  his  analysis  upon  the  year 
1916,  Mr.  Oldham  found  that  of  the  177  roads  earning 
$1,000,000  or  more  annually  of  operating  revenues, — the 
so-called  Class  I  roads,  which  do  97  per  cent  of  the 
business  of  the  country, — 87  of  them  were  controlled 

1  Consult  A  Comprehensive  Plan  for  Railroad  Consolidation,  by  John 
E.  Oldham.  Reprinted  from  The  Nation's  Business,  February  1920. 


272  RAILROADS  AND  GOVERNMENT 

through  stock  ownership  by  45  systems.  These  45  sys- 
tems with  their  subsidiaries  produced  96  per  cent  of 
the  total  earnings  and  operated  93  per  cent  of  the  mile- 
age. Furthermore,  this  analysis  revealed  the  fact  that 
the  consolidation  movement  had  taken  place  along  the 
lines  that  the  statute  expressly  approves  as  consistent 
with  public  policy.  Mr.  Oldham  constructed  groups  of 
roads  in  harmony  with  the  natural  consolidation  move- 
ment, preserving  the  existing  "channels  of  trade  and 
commerce."  He  found  as  between  his  competitive  sys- 
tems thus  created  a  great  similarity  in  earnings  per  mile, 
in  relation  of  freight  to  passenger  traffic,  in  the  char- 
acter of  the  tonnage,  in  the  average  rates  competitive 
and  non-competitive,  and  in  the  operating  results.  More- 
over, there  was  little  difference  in  the  operating  ratio 
or  in  the  costs  of  operation  for  the  different  accounts. 
The  real  variation  among  the  roads  was  found  to  be  in 
the  character  of  their  capitalization  and  consequently 
in  their  credit  standing.  According  to  his  analysis,  the 
roads  that  were  weak  because  of  unfavorable  location 
handled  only  10  per  cent  of  the  traffic.  These  were 
mostly  small  roads  with  low  income  return  that  could 
be  absorbed  into  larger  systems.  The  other  weak  roads 
(handling  30  per  cent  of  the  traffic)  were  weak  because 
unsoundly  financed,  either  through  overcapitalization 
or  because  of  the  excessive  proportion  of  bonds  in  the 
total  of  capital  securities.  In  other  words,  if  this  an- 
alysis is  sound  for  a  considerable  proportion  of  the  ser- 
viceable mileage,  the  problem  is  not  a  hopeless  one.  It 
is  a  problem  of  financial  adjustment  within  systems  al- 
ready loosely  formed  rather  than  one  of  merging  alien 
properties.  The  details  of  the  plan  here  referred  to  are 
not  important  for  our  purpose,  but  the  scheme  is  worthy 
of  examination  as  an  indication  that  the  task  imposed 
upon  the  Commission  is  not  an  impracticable  one,  and 
that  if  a  plan  can  be  worked  out  that  meets  the  require- 


RAILROAD  CONSOLIDATION  273 

ments  of  the  law  and  at  the  same  time  adjusts  itself  to 
a  natural  economic  tendency  and  appeals  to  the  self- 
interest  of  the  carriers  concerned,  the  end  sought  may  be 
possible  of  achievement  without  resort  to  compulsion. 

The  decision  in  the  Northern  Securities  Case  in  1904 
which  put  an  end  to  the  combination  of  two  paralleling 
roads  stretching  two-thirds  of  the  way  across  the  conti- 
nent, was  regarded  by  many  as  an  ill-advised  interfer- 
ence with  a  salutary  movement  toward  greater  efficiency 
in  transportation  service.  Still  stronger  was  this  feel- 
ing when  the  Union  Pacific-Southern  Pacific  merger 
was  dissolved,  for  the  genius  of  a  Harriman  had  grasped 
the  fundamentals  of  large-scale  transportation  service 
and  was  working  out  an  organization  that  was  bound 
in  the  long  run  to  benefit  the  public  at  large.  Yet,  on 
the  whole,  the  decisions  of  the  court  are  not  to  be  de- 
plored. They  exercised  a  wholesome  check  on  a  move- 
ment that  was  little  understood  and  appreciated  by 
the  public  and  was  not  adequately  safeguarded.  The 
financiers  were,  to  a  large  degree,  left  to  their  own  de- 
vices, and  beyond  the  insistence  by  the  court  in  the 
Union  Pacific  Case  that  the  dissolution  should  be  actual, 
little  authority  was  available  to  protect  the  public  inter- 
est. It  is  only  necessary  to  look  back  over  the  numerous 
cases  of  financial  maladministration  of  railroad  proper- 
ties, extending  down  even  to  the  time  of  the  war,  to 
realize  how  helpless  the  public  has  been  in  the  face  of 
any  scheme  for  financial  manipulation. 

Consolidation  under  the  Act  of  1920  is  a  very  differ- 
ent matter,  accompanied  as  it  is  by  legislation  that 
controls  the  form  of  agreement,  the  capitalization,  the 
excess  earnings  beyond  a  fixed  rate,  and  that  places 
responsibility  for  methods  and  results  upon  the  federal 
authority.  Moreover,  it  is  perfectly  evident  that  during 
the  last  decade  there  has  been  a  growing  recognition  on 
the  part  of  railroad  executives  and  financial  advisers 


274 


RAILROADS  AND  GOVERNMENT 


that  the  railroad  business  must  be  managed  not  only 
primarily,  but  solely,  in  the  public  interest,  and  that 
private  interest  must  be  restricted  in  its  activities  and 
in  its  profits  to  a  degree  of  freedom  that  is  merely  suffi- 
cient to  secure  the  necessary  financial  support.  It  can- 
not be  said  positively  that  there  will  never  again  be 
financial  juggling  in  the  railroad  business.  It  can  be 
asserted  that  such  transactions  have  been  very  seriously 
discouraged. 

The  introduction  of  the  consolidation  plan  into  the 
statute  was  for  a  very  definite  purpose.  It  had  long 
been  in  the  minds  of  those  who  were  trying  to  find  a 
solution  for  the  problem  of  the  "weak  and  strong  road  "- 
the  problem  handled  in  another  fashion  in  the  rate  sec- 
tion. It  seemed  obvious  that  if  the  prosperous  road 
could  be  made  to  take  over  its  less  fortunate  competitor, 
rates  that  would  bring  a  fair  return  upon  the  combined 
investment  would  be  lower  than  would  necessarily  pre- 
vail under  a  system  where  rates  must  be  high  enough  to 
sustain  the  "weak  road"  by  itself.  Earnings  of  the 
more  prosperous  lines  were  to  be  diluted  in  favor  of  the 
less  prosperous.  It  is  clear  that  no  complete  solution 
of  this  problem  through  the  agency  of  consolidation  was 
to  be  attained  unless  the  competing  systems,  after  the 
consolidation  plan  was  in  effect,  were  earning  substan- 
tially the  same  rate  of  return  upon  their  respective 
investments.  Hence  the  instructions  in  the  statute  to 
smooth  out  all  the  inequalities  in  traffic  and  operation 
and  bring  the  systems  at  the  end  of  the  year  into  a 
similar  condition  of  prosperity.  But  railroad  traffic  and 
earnings  and  operating  efficiency  do  not  work  with  this 
degree  of  mathematical  accuracy,  and  approximation  to 
this  ideal  is  probably  all  that  can  reasonably  be  looked  for. 

It  has  already  been  noted  that  what  Congress  is  seek- 
ing to  preserve  is  competition  in  service  rather  than 
competition  in  rates.  It  is  a  common  remark  that 


RAILROAD   CONSOLIDATION  275 

competition  in  rates  no  longer  exists,  that  in  spite  of  all 
legislative  attempts  to  preserve  and  enforce  it  through 
our  anti-trust  laws,  it  simply  refuses  to  function,  and 
that  rales  are  fixed  by  agreement  or  informal  under- 
standing in  the  very  teeth  of  the  law.  This  common 
observation  is  subject  to  the  criticism  that  affects  all 
generalization.  It  is  never  altogether  true.  Competi- 
tion in  the  sense  of  violent  rate-cutting  is,  to  a  large 
degree,  ended.  Rate  wars  cannot  be  carried  on  with 
any  degree  of  success  when  rates  must  be  filed  thirty 
days  in  advance  of  their  effective  date.  Moreover,  now 
that  the  Commission's  jurisdiction  extends  to  the  de- 
termination of  a  minimum  rate,  which  gives  it  authority 
to  suspend  and  disapprove  of  a  low  rate  as  well  as  a  high 
one,  the  old-fashioned  spectacular  rate  war  has  probably 
passed  into  history.  But  this  by  no  means  implies 
that  all  competition  in  rates  is  gone.  Although  the 
customary  method  at  present  of  making  changes  in  com- 
petitive rates  is  by  conference  of  railroad  officials,  yet 
agreement  in  rates  is  not  assured  in  advance  and  is  not 
always  reached.  A  proposal  of  a  member  of  the  con- 
ference for  a  reduction  in  a  rate  on  a  specific  commodity 
to  a  specified  market  may  be  met  with  flat  refusal  to 
agree  by  the  other  interested  carriers.  In  such  case, 
the  road  proposing  the  change  may  withdraw  its  sug- 
gestion or  it  may  decide  to  file  the  rate  individually.  In 
the  latter  case,  it  usually  happens  that  the  other  roads 
follow  suit.  This  is  nothing  more  than  a  gentlemanly 
and  somewhat  deliberate  form  of  competition.  And 
this  form  still  prevails  widely  throughout  the  country. 
It  is  to  a  large  degree  in  the  public  interest.  When  it 
goes  beyond  this  point,  as  may  be  the  case  when  some 
powerful  industrial  interest  brings  pressure  to  bear  to 
secure  rates  unreasonably  low  and  thus  imposes  an  im- 
proper burden  upon  other  traffic,1  the  Commission  must 

1  See  Dunn,  American  Transportation  Question,  page  65,  for  an  exam- 
ple of  an  unreasonably  low  rate  on  copper. 


276  RAILROADS  AND  GOVERNMENT 

be  relied  upon  to  correct  the  injustice  under  its  power  to 
prescribe  a  minimum. 

But  what  is  competition  in  service?  Is  it  the  mere 
equivalent  of  competition  in  rates?  Is  the  distinction 
;  merely  that  in  the  one  case  you  give  the  same  service 
1  at  a  less  price,  and  in  the  other  you  give  more  service 
for  the  same  price?  It  all  depends  upon  what  is  com- 
passed in  the  word  "service."  If  by  service  is  meant 
merely  the  special  privileges  which  shippers  have  come 
to  expect,  such  as  milling-in-transit,  reconsignment,  free 
storage  and  cartage,  average  demurrage  agreements,  and 
a  host  of  others,  it  may  be  conceded  that  service  can  be 
commuted  into  price,  and  that  there  is  no  distinction  in 
the  two  types  of  competition.  In  fact,  these  special 
privileges  the  regulating  bodies  now  generally  require  to 
be  filed  with  the  rate  and  to  become  a  part  thereof. 

But  there  is  a  larger  aspect  of  service  which  is  not 
concerned  with  these  details  of  operation.  It  might 
best  be  described  as  railroad  statesmanship,  that  struggle 
for  traffic  which  realizes  itself  in  far-sighted  measures 
of  territorial  development,  in  projects  for  improving  the 
public  welfare  in  cities  and  sections  which  the  road 
serves,  in  active  participation  in  the  life  of  the  com- 
munities that  are  associated  with  the  particular  rail- 
road system.  Such  competition  is  precious,  it  is  vital 
to  the  healthy  growth  and  development  of  community 
and  railroad  alike,  it  cannot  safely  be  allowed  to  disap- 
pear so  long  as  private  operation  of  railroads  continues. 
It  is  one  of  the  big  things  we  are  likely  to  lose  if  we  turn 
to  public  ownership.  No  Government  system  yet  de- 
vised has  developed  men  with  the  vision  and  the  energy 
and  the  skill  to  achieve  results  in  this  direction  that  the 
competitive  railroad  system  has  produced.  When  our 
industrial  society  has  become  static  and  transportation 
means  nothing  more  than  the  humdrum  carting  back 
and  forth  of  the  standardized  products  from  one  stand- 


RAILROAD  CONSOLIDATION  277 

ardized  community  to  another,  then  we  shall  be  ready 
for  our  bureaucratic  governmental  regime.  But  that 
time,  fortunately,  is  not  yet. 

The  question  of  the  constitutionality  of  the  consolida- 
tion procedure  laid  down  by  Congress  will  doubtless  come 
up  for  determination.  It  is  inconceivable  that  the  states, 
having  enjoyed  from  the  beginning  almost  the  sole  power 
over  incorporation  and  consolidation,  should  tamely  sub- 
mit to  this  midnight  robbery  without  a  protest  and 
should  rest  content  with  the  small  sop  of  an  invitation  to 
witness  the  act.  But  the  fact  that  the  problem  tran- 
scends state  lines  and  that  its  pressure  is  irresistible 
makes  it  seem  clear  that  the  states  are  fighting  a  losing 
battle. 

There  is  much  sentiment  in  the  country  for  making 
this  consolidation  scheme  compulsory.  This  has  been 
strenuously  opposed  by  the  railroads,  particularly  by 
the  more  prosperous  ones  that  have  feared  the  dilution 
of  their  earnings  through  the  compulsory  absorption  of 
less  productive  systems.  It  is  a  question,  however, 
whether  many  of  these  same  roads,  if  they  are  perchance 
blessed  with  a  surplus  which  they  are  compelled  to  di- 
vide with  the  Government,  will  not  find  it  rather  to  their 
interest  to  absorb  their  less  prosperous  competitors  and 
thereby  reduce  their  earnings  below  the  rate  of  return  that 
calls  for  "recapture."  Whether  compulsory  consolida- 
tion will  be  definitely  demanded  by  the  public  will  de- 
pend upon  the  degree  to  which  voluntary  consolidation 
is  successful.  For  once  the  advantages  of  this  system 
are  thoroughly  understood,  the  railroads  cannot  with- 
stand public  pressure.  Not  only  does  it  serve  to  rid  the 
country  of  the  troublesome  problem  of  competition  be- 
tween roads  of  unequal  competitive  strength,  but  it 
has  direct  benefits  for  the  public  in  the  savings  in  opera- 
tion. Duplication  would  be  avoided  in  many  ways. 
Roundabout,  unnecessary,  wasteful  transportation  would 


278  RAILROADS  AND   GOVERNMENT 

be  eliminated.  Traffic  would  seek  the  normal  and  direct 
route  instead  of  meandering  aimlessly  about  the  country 
at  the  behest  of  traffic  officials.  It  is  a  fallacy  far  too 
wide-spread  that  because  a  road  carries  traffic  far  out  of 
its  natural  course  at  the  same  rate  as  though  the  traffic 
were  hauled  directly,  there  is  no  loss,  but  rather  an  ac- 
tual gain,  in  the  fact  of  additional  service.  Unnecessary 
and  wasteful  transportation  can  never  by  any  process  of 
legerdemain  be  made  socially  justifiable.  The  fallacy 
arises  from  a  contemplation  of  the  individual  carrier 
rather  than  a  consideration  of  the  service  of  transporta- 
tion from  the  standpoint  of  the  society  served.  Many 
of  our  false  conceptions  arise  from  the  existence  in  this 
country  of  an  absurdly  large  number  of  separately  oper- 
ated railroad  systems.  A  far  sounder  solution  of  our 
unsatisfactory  situation  than  the  plan  of  Government 
ownership  which  many  advocate,  is  to  be  found  in  the 
development  of  closer  co-operation  between  individual 
systems,  aided  and  strengthened  by  a  large  degree  of 
consolidation. 

No  better  evidence  of  the  change  in  public  opinion  con- 
cerning the  closer  relations  of  railroads  to  each  other  can 
be  found  than  the  amendment  to  Section  5,  the  anti- 
pooling  section  of  the  Interstate  Commerce  Act.  This 
section,  which  forbade  agreements  between  roads  for  the 
division  of  traffic  or  earnings,  was  passed  as  a  protest 
against  the  practices  of  competitive  roads  for  the  ten 
years  preceding  1887,  and  embodied  the  fundamental 
opposition  of  the  American  people  to  any  scheme  that 
gave  opportunity  for  the  creation  of  monopolies.  This 
attitude  has  prevailed  almost  continuously  since  that 
time,  and  has  found  expression  in  other  legislation,  nota- 
bly that  for  the  regulation  of  industrial  combinations. 
In  spite  of  repeated  recommendations  by  the  Interstate 
Commerce  Commission,  and  the  many  attempts  made  in 


RAILROAD  CONSOLIDATION  279 

Congress  from  time  to  time,  the  anti-pooling  clause  has 
stood  without  an  alteration  since  its  adoption  thirty- 
four  years  ago.  Yet  after  the  war,  when  service  rather 
than  low  rates  was  the  desideratum,  and  when  competi- 
tion of  individual  carriers  no  longer  seemed  the  solution 
of  all  ills,  when  the  advantages  of  co-operation  which 
prevailed  under  federal  operation  began  to  be  realized, 
and  when  the  power  of  federal  regulation  in  general  had 
gained  the  support  and  confidence  of  the  public,  the 
pooling  clause  was  quietly  altered  to  correspond  with 
the  spirit  of  the  consolidation  plan.  The  Commission  is 
now  given  the  power  to  approve  and  authorize  division 
of  traffic  and  earnings  under  such  regulations  as  it  deems 
just  and  reasonable,  if  it  finds  that  such  an  agreement 
will  be  in  the  interest  of  better  service  to  the  public  or 
will  result  in  economy  of  operation,  and  will  not  unduly 
restrain  competition. 

Whether  there  will  be  any  incentive  on  the  part  of 
carriers  to  take  advantage  of  this  privilege  cannot  be 
foretold,  because  this  is  only  one  of  various  amend- 
ments which  will  affect  the  carriers'  relations  to  one  an- 
other and  to  the  regulating  agency.  Much  water  has 
flowed  over  the  dam  since  carriers  and  commissions  first 
began  their  advocacy  of  regulated  pooling,  and  the  new 
legislation  may  render  this  clause  of  little  importance. 
Should  the  consolidation  plan  be  made  use  of  in  any 
comprehensive  fashion,  it  might  render  pooling  unneces- 
sary. If  a  prosperous  road  absorbs  a  weak  and  trouble- 
some competitor,  it  has  destroyed  the  reason  for  a  pool- 
ing agreement  between  them.  On  the  other  hand,  it 
may  develop,  even  under  consolidation,  that  the  larger 
competitive  units  thereby  created  will  need  a  pooling 
contract  to  steady  the  situation.  Severe  competition 
between  vast  consolidated  systems  contains  far  more 
elements  of  industrial  disturbance  than  the  competition 
of  1887  could  possibly  have  had.  Yet  the  consolidation 


280  RAILROADS  AND  GOVERNMENT 

plan  contemplates  uniform  rates  with  uniform  percentage 
of  profit,  which  if  it  works  out  successfully  will  remove 
the  underlying  necessity  for  agreements  to  pool  traffic 
and  earnings. 

And  again,  the  power  granted  the  Commission  to  regu- 
late the  minimum  rate  added  to  its  power  over  the  maxi- 
mum leaves  the  carrier  with  so  little  independence  in 
rate  making  that  rate  cutting,  the  consequences  of  which 
were  largely  responsible  for  the  demand  for  pooling,  is 
thoroughly  discouraged.  If  the  Commission  on  its  own 
initiative  as  well  as  on  complaint  can  put  a  stop  to  rates 
that  are  too  low  from  the  standpoint  of  the  public  inter- 
est, revenues  need  not  be  drained  away  in  foolish  compe- 
tition. 

Doubtless  at  the  request  of  the  express  companies,  the 
Transportation  Act  of  1920  gave  the  Commission  power 
to  approve  the  consolidation  of  the  four  express  com- 
panies— the  American,  Adams,  Wells-Fargo,  and  South- 
ern— into  the  American  Railway  Express  Company,  which 
had  been  the  operating  agency  during  the  federal  period. 
Upon  application  of  the  companies,  the  Commission  gave 
its  approval  for  consolidation.1  Some  opposition  devel- 
oped at  the  hearing  based  upon  the  danger  of  monopoly. 
But  the  Commission  pointed  out  that  competition  would 
still  prevail  to  a  lively  degree  through  the  activities  of 
the  parcel  post,  the  fast  freight  business  of  the  roads, 
and  the  increasing  traffic  of  the  motor-trucks.  In  any 
case,  rates  and  service  were  under  Commission  regula- 
tion. Moreover,  there  was  doubt  whether  the  express 
companies  would  resume  business  except  under  a  unified 
organization  that  would  avoid  competitive  wastes.  A 
contract  with  the  railroads  was  approved  which  was  to 
be  substituted  for  the  bargains  previously  made  between 
individual  railroads  and  express  companies.  Railroads 
were  to  be  divided  into  three  geographical  groups:  East- 
'  59  I.  C.  C.,  459  (1920). 


RAILROAD   CONSOLIDATION  281 

ern,  Southern,  and  Western.  The  operating  account 
covering  the  express  business  for  each  of  these  groups  was 
to  be  closed  monthly.  After  the  deduction  of  the  op- 
erating expense  items,  the  balance  of  the  revenue  was  to 
be  assigned  2^  per  cent  to  the  express  company  and  the 
remainder  to  the  railroads  in  the  proportion  that  the 
gross  express  transportation  revenue  on  each  road  bore 
to  the  aggregate  express  revenue  for  the  group.  When 
the  portion  assigned  to  the  express  company  annually 
exceeded  6  per  cent  upon  its  property  and  equipment, 
the  excess  was  to  be  assigned  half  and  half  to  the  express 
company  and  the  railroads  until  10  per  cent  was  reached 
by  the  express  company,  when  any  further  excess  was  to 
be  divided  one-fourth  to  the  express  company  and  three- 
fourths  to  the  railroads.1 

This  contract  emphasizes  what  has  long  been  apparent 
to  observers — that  the  express  company  is  a  somewhat 
superfluous  piece  of  machinery  in  our  transportation 
system.  The  principal  function  involved  is  the  trans- 
portation of  the  express  matter  for  which  the  railroad 
properly  receives  the  bulk  of  the  transportation  revenue. 
The  negotiation  of  a  single  contract  by  the  railroads  of  a 
large  geographical  group  with  a  single  express  agency 
emphasizes  the  fact  that  they  are  paying  what  is  neces- 
sary to  get  done  for  them  what  they  would  otherwise 
perform  for  themselves.  It  is  a  question  whether  the 
time  has  not  come  for  taking  the  last  and  natural  step. 
The  Government  has  shown  the  way  by  absorbing  into 
the  parcel  post  a  large  part  of  the  express  package  busi- 
ness. It  would  only  be  necessary  for  the  railroads  to 
perfect  their  fast  freight  service  and  an  auxiliary  delivery 
system  to  complete  the  job.  The  business  could  probably 
be  done  at  less  expense  than  now,  and  this  saving  in  ex- 
pense would  accrue  to  the  public  in  lower  rates  and  to 
the  railroads  in  higher  earnings.  In  fact,  some  roads, 
J59  I.  C.  C.,  518  (1920). 


282  RAILROADS  AND  GOVERNMENT 

the  Great  Northern  and  the  Northern  Pacific,  for  ex- 
ample, have  been  operating  their  own  express  companies 
for  years,  and  this  year  the  Southern  Railway  and  the 
Mobile  and  Ohio  have  organized  their  own  agency.1 

Federal  Incorporation 

Many  of  the  plans  submitted  to  congressional  com- 
mittees at  the  time  of  the  passage  of  the  Act  of  1920 
provided  for  federal  incorporation  of  transportation  com- 
panies. Some  advocated  voluntary  incorporation,  others 
compulsory.  This  proposal  is  not  new  and  its  constant 
recurrence  is  evidence  of  an  inherent  vitality  derived 
from  sound  and  healthy  roots.  Its  fundamental  justifi- 
cation is  in  the  fact  that  a  corporation  created  by  the 
federal  government  is  subject  in  all  respects  to  its  ex- 
clusive control,  freed  from  the  diversity  and  conflict  of 
the  many  state  jurisdictions.  In  connection  with  all 
the  steps  of  incorporation  and  capitalization,  the  control 
by  a  single  agency  would  be  far  more  effective  than  the 
multitudinous  and  conflicting  laws  of  unequal  value  and 
severity  that  now  operate  upon  our  railroad  companies. 
But  the  project  met  with  no  considerable  support.  Bit- 
ter state  opposition  because  of  the  loss  of  police  and  tax- 
ing powers  was  anticipated.  There  would  be  litigation 
and  years  of  controversy.  Congress  clearly  shrank  from 
the  consequences.  It  would  destroy  local  autonomy, 
which  many  considered  a  calamity.  No  united  opinion 
could  be  obtained  as  to  the  constitutionality  of  the 
project.  It  was  probable  that  an  act  forbidding  a  state 
corporation  from  enjoying  the  right  to  engage  in  inter- 
state commerce  would  be  found  to  be  unconstitutional, 

1  On  September  i,  1920,  the  American  Railway  Express  Company 
entered  into  a  contract  with  the  Great  Northern  Express  Co.  and  the 
Northern  Pacific  Express  Co.  to  purchase  their  equipment,  the  prop- 
erty of  these  companies  having  been  operated  by  the  American  Railway 
Express  Co.  since  July  i,  1918. 


RAILROAD  CONSOLIDATION  283 

and  yet  some  such  ruthless  limitation  would  be  necessary 
if  compulsory  federal  incorporation  were  to  be  really 
effective.  Incorporation  that  was  merely  permissive 
would  accomplish  but  little.  The  obvious  purpose  of 
the  railroads  in  advocating  federal  incorporation,  albeit 
of  the  voluntary  type,  was  to  free  themselves  from  the 
jurisdiction  of  the  state  commissions.  Yet  this  would  not 
necessarily  do  away  with  control  by  the  state  commis- 
sions any  more  than  the  present  state-chartered  com- 
panies are  free  from  control  of  the  federal  commission, 
and  in  any  case  this  freedom  from  state  jurisdiction  is 
being  gradually  accomplished  through  the  operation  of 
other  forces. 

Federal  incorporation  did  not  become  a  part  of  the 
statute,  but  if  anything  were  to  be  undertaken  at  present 
in  this  direction,  the  first  step  might  well  be  the  crea- 
tion of  federal  holding  companies  with  power  to  purchase 
the  stocks  of  railroads.  This  scheme  would  provide  a 
step  in  the  development  of  the  consolidation  plan.  The 
properties  could  be  united  at  the  beginning  through  a 
holding  company  and  eventually  merged  into  a  single 
corporation.  The  federal  government,  by  laying  down 
stipulations  under  which  charters  would  be  issued,  could 
exercise  a  direct  and  wholesome  and  unifying  influence 
upon  a  situation  that  in  the  past  has  been  chaotic  in  the 
extreme. 

So  far  as  the  whole  question  of  constitutionality  is  con- 
cerned, not  only  with  reference  to  consolidation  and  to 
federal  incorporation  but  to  all  plans  for  social  advance- 
ment, the  history  of  the  growth  of  federal  power  and  the 
attitude  of  the  courts  with  reference  thereto  should  not 
lead  to  despair  or  even  to  hesitation.  If  the  project  is 
essential  to  the  public  welfare,  constitutional  objections 
will  sooner  or  later  be  swept  aside.  The  court  exists  to 
promote,  not  to  impede,  the  public  welfare. 


CHAPTER  XX 

FEDERAL  REGULATION   OF   CAPITALIZATION 

AFTER  years  of  agitation  and  recommendation  by  offi- 
cial bodies  and  abortive  attempts  to  enact  legislation, 
the  exclusive  power  has  finally  been  intrusted  to  the 
Commission  in  the  Act  of  1920  to  regulate  the  issue  of 
securities  of  interstate  railroads.  This  proposal  was  one 
of  the  features  of  President  Taft's  bill  of  1910.  At  that 
time  it  was  flatly  opposed  by  the  Senate  and  there  was 
not  enough  favorable  sentiment  in  the  House  to  over- 
come the  Senate's  opposition.  Accordingly  the  Act  when 
finally  adopted  contained  an  innocuous  provision  for  the 
appointment  of  a  federal  securities  commission,  which 
should  report  upon  the  entire  subject.  The  personnel 
of  this  Commission,  of  which  President  Hadley,  of  Yale 
University,  was  chairman,  was  largely  of  a  character  to 
insure  that  no  path-breaking  steps  in  Government  con- 
trol would  be  advocated.  Publicity  was  set  forth  as  the 
genuine  cure  for  all  ills.  Federal  regulation  of  security 
issues  was  opposed  because  of  its  doubtful  constitution- 
ality and  the  inevitable  conflict  that  would  be  engendered 
with  the  charter-granting  states.  Exactly  what  influence 
this  report  exerted  it  is  impossible  to  say.  Its  arguments 
on  the  points  just  mentioned,  as  well  as  on  many  others 
covered  in  the  report,  such,  for  example,  as  the  relation 
of  capitalization  to  rates,  provided  much  ammunition 
for  conservative  use,  and  probably  assisted  in  delaying 
action  upon  this  pressing  problem.  Attempts  were  made 
from  time  to  time  in  Congress  to  secure  a  law  accom- 
plishing effective  control,  but  they  never  up  to  the  time 
of  the  war  came  within  range  of  probable  enactment. 

It  is  a  common  assertion  that  the  public  is  not  inter- 
ested in  capitalization,  but  only  in  rates,  that  there  is 

284 


FEDERAL  REGULATION  OF  CAPITALIZATION  285 

no  relation  between  the  two,  and  that  the  question  of 
security  issues  is  one  for  the  investor  alone.  No  dictum 
in  the  field  of  corporation  finance  has  had  wider  vogue 
and  with  less  justification.  There  is,  to  be  sure,  little 
if  any  relation  between  the  outstanding  securities  of  a 
railroad  and  any  particular  rate  offered  to  a  shipper, 
although  it  would  not  even  here  be  absolutely  true  to 
say  that  the  traffic  manager  when  he  figures  out  a  new 
rate  does  not  have  in  his  mind  to  some  extent  the  effect 
of  this  rate  upon  the  net  earnings  of  his  company.  But 
when  an  entire  schedule  of  rates  is  under  consideration, 
and  particularly  when  it  is  under  attack  by  the  public 
before  a  regulating  body,  the  relationship  between  the 
rate  schedule  and  the  outstanding  securities  becomes 
clear  and  direct,  and  it  is  made  clearer  by  the  arguments 
of  the  very  officials  who  have  so  frequently  asserted  that 
no  relation  exists.  They  urge  that  rates  must  not  be 
reduced  or  that  they  must  be  increased,  in  order  not  only 
that  they  may  meet  their  contractual  payments  of  inter- 
est, but  also  that  their  shareholders  shall  have  the  re- 
turn to  which  they  are  entitled.  It  becomes  then  a 
very  real  interest  to  the  public  whether  these  securities 
in  the  hands  of  bond  and  stock  holders  are  representative 
of  actual  value  and  are  entitled  to  a  claim  on  the  earn- 
ings. 

But  again,  the  officials  argue  much  more  potently  that 
they  must  pay  an  adequate  return  upon  their  capital 
securities  in  order  that  their  credit  in  the  money  market 
may  not  become  impaired.  They  are  constant  borrowers 
in  one  form  or  another,  and  their  ability  to  obtain  funds 
at  reasonable  rates,  or  to  obtain  them  at  all,  depends  in 
large  degree  upon  how  they  are  treating  their  own  stock 
and  bond  holders.  This  again  is  a  public  and  not  a  pri- 
vate corporate  problem.  For  a  constant  stream  of  new 
capital  is  essential  in  this  rapidly  developing  country  to 
the  furnishing  of  the  service  that  the  public  requires.  It 


286  RAILROADS  AND   GOVERNMENT 

is  short-sighted  to  assume  that  the  investor  alone  is  inter- 
ested in  the  credit  of  a  public-service  corporation.  We 
have  here,  then,  a  very  definite  reason  for  some  sort  of 
regulation  of  security  issues,  the  interest  of  the  public 
(i)  in  the  disposition  that  is  made  of  net  earnings  derived 
from  rates  that  the  public  pays,  and  (2)  in  the  mainte- 
nance of  a  standard  of  credit  which  will  insure  a  service 
that  keeps  pace  with  public  requirements. 

But  the  public  is  even  more  interested,  if  that  were 
possible,  in  honest  financial  management.  Reckless 
speculation,  inside  looting,  carelessness,  and  inefficiency 
affect  not  alone  the  creditors  and  partners  in  the  specific 
enterprise,  but  operate  directly  to  injure  the  public.  For 
it  all  means  that  funds  paid  into  the  corporation  through 
rates  for  the  purpose  of  covering  legitimate  expenses, 
rewarding  capital,  and  insuring  the  credit  necessary  to 
provide  betterments  and  extensions,  are  dissipated  and 
devoted  to  personal  use,  and  that  the  freebooters  who 
escape  with  the  loot  leave  the  stripped  hulk  to  be  re- 
stored by  the  public. 

One  of  the  curious  and  widely  accepted  fables  of  rail- 
road history  is  that  railroad  wrecking  is  a  function  of 
construction  finance  and  that  it  largely  has  disappeared 
with  the  fading  of  this  era  into  the  past.  But  one  has 
only  to  read  the  reports  of  the  Interstate  Commerce 
Commission  issued  since  1914,  containing  investigations 
into  the  financial  transactions  of  certain  carriers,  to 
realize  that  human  nature  has  not  changed  and  that 
eternal  vigilance  alone  is  the  price  of  financial  rectitude. 
A  few  quotations  from  the  Commission's  reports  of  these 
investigations  will  serve  to  enforce  the  argument. 

From  the  "Frisco"  report:1 

"The  sale  of  securities  to  the  investing  public  through 
the  bankers  at  a  time  when  every  appearance  indicated 

1  29  I.  C.  C.,  140  (January  1914). 


FEDERAL  REGULATION  OF   CAPITALIZATION  287 

the  insolvency  of  the  issuing  company,  invites  and  war- 
rants condemnation  of  all  those  who  assisted  or  partici- 
pated in  such  sale." 

From  the  New  Haven  report:1 

"The  New  Haven  system  has  more  than  300  sub- 
sidiary corporations,  in  a  web  of  entangling  alliances 
with  each  other,  many  of  which  were  seemingly  planned, 
created,  and  manipulated  by  lawyers  expressly  retained 
for  the  purpose  of  concealment  or  deception.  .  .  . 

"The  result  of  our  research  into  the  financial  workings 
of  the  former  management  of  the  New  Haven  system  has 
been  to  disclose  one  of  the  most  glaring  instances  of 
maladministration  revealed  in  all  the  history  of  American 
railroading." 

From  the  Louisville  and  Nashville  report:2 

"The  above  facts  illustrate  the  manner  in  which  perma- 
nent improvements  on  the  Louisville  and  Nashville  have 
in  the  past  to  a  large  extent  been  made  out  of  earnings 
and  subsequently  charged  to  the  capital  account.  As 
the  Commission  in  its  annual  reports  has  previously 
pointed  out,  only  by  the  fullest  publicity  and  public  su- 
pervision of  stock  and  bond  issues  may  such  increasing  of 
the  capital  accounts  of  carriers  at  the  expense  of  the  pub- 
lic be  prevented." 

From  the  report  upon  that  monstrosity,  the  Rock 
Island  Company,  in  which  two  holding  companies  were 
created  out  of  hand  for  no  other  purpose  than  to  deceive 
the  public  and  line  the  pockets  of  the  promoters:3 

"Misrepresentation  of  assets  in  reports  to  stockholders 
appears  to  have  been  a  practice  of  the  directors  of  the 
railway  company.  .  .  . 

*3i  I.  C.  C,  32  (July  1914).      233  I.  C.  C.,  172  (February  1915). 
'36  I.C.  C,  56,61  (July  1915). 


288  RAILROADS  AND  GOVERNMENT 

"The  property  of  the  railway  company  will  be  called 
upon  for  many  years  to  make  up  the  drain  upon  its  re- 
sources resulting  from  transactions  outside  the  proper 
sphere  in  which  stockholders  had  a  right  to  suppose  their 
moneys  were  invested." 

From  the  report  on  the  Pere  Marquette  and  the  Cin- 
cinnati, Hamilton  and  Dayton:1 

Referring  to  the  purchase  of  a  terminal  company, 
"These  'fiscal  agents,'  without  themselves  putting  up  a 
penny,  borrowed  $1,500,000  on  the  notes  of  the  Pere 
Marquette,  purchased  worthless  stocks  at  41,  sold  the 
same  immediately  to  the  C.,  H.  and  D.  at  42,  which  on 
the  same  day  sold  the  same  to  the  Pere  Marquette  at 
47.  The  amount  paid  by  the  latter,  $1,645,000,  was 
entered  as  an  'investment,'  was  subsequently  lost  by 
reason  of  foreclosure  of  the  terminal  company  bonds, 
and  in  1908  was  charged  as  a  worthless  asset  to  the  Pere 
Marquette's  'cost  of  road  and  equipment.'  ..." 

"The  exploitation  in  1903,  1904,  and  1905  of  the  Pere 
Marquette  and  the  C.,  H.  and  D.  was  not  an  incident  of 
railroad  construction.  The  properties  had  long  been  es- 
tablished. Whatever  control  or  regulation  of  the  issue 
of  railroad  securities  was  exercised  by  the  states  in  which 
these  roads  operate  was  inadequate  to  prevent  the  ex- 
ploiting or  to  forestall  subsequent  hasty  and  unwise  re- 
organization. To  the  extent  that  these  flotations  ulti- 
mately lodged  in  the  hands  of  innocent  investors,  whether 
here  or  abroad,  the  public  was  deeply  wronged.  What- 
ever control  or  regulation  was  had  of  the  properties  and 
operations  of  the  two  roads  was  not  sufficient  to  keep 
them  in  condition  to  satisfactorily  serve  the  population 
dependent  upon  them.  The  result  has  been  the  same 
with  each,  financial  disaster  to  the  carriers,  serious  loss 

1 44  I.  C.  C.,  147,  222  (March  1917). 


FEDERAL  REGULATION  OF  CAPITALIZATION  289 

to  the  holders  of  their  securities,  deterioration  of  their 
physical  properties,  and  a  marked  impairment  of  ability 
to  perform  their  functions  as  public  servants. 

"  Nothing  disclosed  in  the  record  before  us  is  to  be  more 
regretted  than  the  readiness  of  great  banking  institutions  in 
our  financial  centres  to  loan  enormous  sums  of  money  upon 
exceedingly  precarious  security  in  aid  of  such  schemes  as  have 
been  devised  in  the  wrecking  of  these  railroads.  Not  only 
this,  but  the  high  officers  of  such  institutions,  while  act- 
ing ostensibly  as  directors  of  the  railroads,  have  in  fact 
been  little  more  than  tools  and  dummies  for  the  pro- 
moters. The  trustees  of  other  people's  money  seem  to 
have  had  little  compunction  about  violations  of  their 
trusts  for  the  benefit  of  the  promoters,  and  at  their  de- 
mand." 

These  are  from  the  cases  that  became  so  notorious  as 
to  compel  official  cognizance.  But  there  have  doubtless 
been  multitudes  of  instances  of  lesser  import  which  have 
not  come  to  public  attention,  but  which  in  lesser  fashion 
call  for  condemnation.  It  is  easy  to  say  that  these  are 
isolated  cases  and  to  complain  because  the  public  general- 
izes from  a  few  striking  instances.  But  the  public  would 
be  negligent  of  its  duty  did  it  not  rise  in  indignation  at 
these  barefaced  lootings  of  public  property.  And  how 
can  the  public  refrain  from  generalizing,  when  they  have 
observed  the  passive  manner  in  which  other  executives 
have  viewed  these  practices  and  belittled  their  signifi- 
cance. Executives  and  directors  of  railroad  corpora- 
tions and  associated  banking-houses  who  are  genuinely 
concerned  in  giving  the  public  the  best  possible  service 
under  honest  management  have  been  at  fault  in  not 
publicly  condemning  these  fraudulent  practices  and  re- 
pudiating their  authors.1 

1  The  Commission  in  the  New  Haven  Case  comments  on  the  "ab- 
sence of  financial  acumen  displayed  by  eminent  financiers  in  directing 
the  destinies  of  this  railroad." 


RAILROADS  AND   GOVERNMENT 

It  is  pertinent  to  quote  at  this  point  the  concluding 
paragraph  of  the  Commission  in  the  New  Haven  investi- 
gation: 

"The  revelations  in  this  record  make  it  essential  for 
the  welfare  of  the  nation  that  the  reckless  and  profligate 
financiering  which  has  blighted  this  railroad  system  be 
ended,  and  until  this  is  fully  done  there  will  be  no  assur- 
ance that  the  story  of  the  New  Haven  will  not  be  told 
again  with  the  stockholders  of  some  other  railroad  sys- 
tem as  the  victims." 

We  have  here,  then,  another  sound  reason  for  some 
form  of  public  regulation  of  security  issues,  the  necessity  of 
protecting  the  public  against  maladministration.  These 
railroads  whose  financial  management  has  been  alluded 
to  as  illustrations  could  not  trace  their  unfortunate  con- 
dition to  the  effects  of  competition  or  rates  or  wages  or 
public  regulation.  A  breach  of  trust  cannot  be  thus 
covered  up.  As  the  Commission  well  puts  it,  it  was 
"betrayal  from  within,  not  compulsion  from  without." 

Thus  far  our  argument  has  related  to  regulation  in 
general.  But  there  is  a  sound  reason  for  locating  this 
power  exclusively  in  the  federal  government,  and  that  is 
found  in  the  conflict  of  state  jurisdiction  and  the  resulting 
impotency  of  state  authority.  Any  one  who  has  had  to  do 
with  the  problem  of  validation  of  the  securities  of  inter- 
state carriers  has  appreciated  the  annoyance  and  delay, 
the  confusion  and  the  senselessness  of  conflicting  state 
statutes.  The  New  Haven,  the  New  York  Central,  and 
others  have  experienced  this  in  recent  years.  It  sub- 
serves no  useful  public  purpose.  It  only  satisfies  local 
pride.  Moreover,  the  fact  that  the  corporation  operates 
in  interstate  commerce  makes  it  possible  to  defeat  the  re- 
quirements of  one  state  by  obtaining  its  franchise  in  a 
more  liberal  one.  There  can  be  no  satisfactory  control 
of  this  problem  without  uniformity  and  there  can  be  no 


FEDERAL  REGULATION   OF   CAPITALIZATION  29 1 

uniformity  without  unity  of  control  and  administration. 
This  exclusive  assertion  of  power  by  the  federal  govern- 
ment may  prove  to  be  unconstitutional,  as  many  lawyers 
assert.  But  the  enormous  public  advantage  to  be  derived 
therefrom  makes  it  worth  trying,  and  this  very  same 
public  advantage  is  one  of  the  reasons  for  optimism  as 
to  the  outcome. 

By  the  recent  legislation  it  is  made  unlawful  for  a 
carrier  to  issue  securities  or  assume  obligations  as  lessor, 
lessee,  or  guarantor,  "even  though  permitted  by  the  au- 
thority creating  the  carrier,"  except  to  the  extent  author- 
ized by  the  Interstate  Commerce  Commission.  Upon 
application  by  the  carrier  for  permission,  it  is  the  duty  of 
the  Commission  to  notify  the  Governor  of  any  state  con- 
cerned, and  state  authorities,  including  railroad  commis- 
sions, have  the  right  to  make  such  representations  as  they 
deem  proper  for  conserving  the  interests  of  their  com- 
munities. Hearings  may  be  held  at  the  discretion  of  the 
Commission  and  the  application  may  be  granted  or  de- 
nied in  whole  or  in  part  and  may  be  modified  by  supple- 
mental order.  The  limitations  within  which  the  discre- 
tion of  the  Commission  is  to  be  exercised  are  carefully 
denned  by  Congress.  The  Commission  may  grant  the 
application  for  an  issue  of  securities  or  for  the  assump- 
tion of  an  obligation  only  when  it  finds  that  the  appli- 
cation 

1.  a.  is  for  a  lawful  object  within  its  corporate  pur- 

poses, 

b.  is  compatible  with  the  public  interest, 

c.  is  necessary  and  appropriate  for  or  consistent 

with   the  proper  performance  of  its   public 
service  by  the  carrier, 

d.  will  not  impair  its  ability  to  perform  that  ser- 

vice, and 

2.  is  reasonably  necessary  and   appropriate  for  the 

purpose. 


2Q2  RAILROADS  AND   GOVERNMENT 

This  guide,  somewhat  vague  and  general  in  character, 
leaves,  as  it  properly  should,  a  broad  power  of  interpre- 
tation to  the  Commission.  However,  it  is  of  significance 
that  stress  is  laid  throughout  upon  the  relation  of  the 
.  new  securities  to  the  public  service.  No  safer  guide 
could  have  been  proposed  and,  if  followed  closely,  will  end 
once  for  all  the  abuses  of  the  past.  The  requirement 
that  the  issue  must  be  for  a  lawful  object  "within  its 
corporate  purposes"  seems  to  recognize  state  authority 
so  far  as  it  is  expressed  in  the  charter  of  the  company. 
An  application  for  a  stock  issue  to  be  used  for  purposes 
not  contemplated  in  the  charter  granted  by  the  state, 
even  though  the  purpose  were  a  lawful  one,  would  ap- 
parently have  to  be  denied  by  the  Commission.  Beyond 
this,  the  jurisdiction  of  the  Commission  is  exclusive  and 
plenary,  and  it  is  expressly  provided  that  no  other  per- 
mission for  issuance  is  needed  by  the  carrier. 

The  Commission's  practice  has  been  to  examine  the 
charter,  including  the  general  incorporation  act  under 
which  the  charter  is  granted,  in  case  such  charter  is 
brought  formally  to  its  attention,  for  the  purpose  of  ascer- 
taining whether  the  issue  of  securities  requested  is  within 
the  corporate  power  of  the  carrier  or  is  ultra  vires.  But 
if  the  charter  is  not  brought  to  its  attention,  it  disregards 
it,  on  the  assumption  that  the  carrier,  having  competent 
legal  advice,  will  take  care  to  act  in  obedience  to  all 
applicable  state  statutes.  State  statutes,  if  not  in  con- 
flict with  the  federal  statute,  and  if  introduced  in  evi- 
dence, are  observed  by  the  Commission,  but  in  no  case 
is  judicial  notice  taken  of  them.  If  the  state  statutes 
are  in  conflict  with  the  federal  statute,  they  are  disre- 
garded. 

The  corporations  themselves  do  not  feel  free  to  disre- 
gard the  various  requirements  of  state  statutes  and  the 
charters  creating  them,  which  prescribe  various  regula- 
tions preliminary  to  the  issuance  of  securities,  such  as 


FEDERAL  REGULATION  OF  CAPITALIZATION  293 

formal  approval  in  stockholders'  meetings,  publication  of 
notices,  and  the  like.  Railroad  counsel  are  solicitous 
that  every  detail  should  be  observed  in  order  that  the 
issue  shall  not  be  invalidated.  This  attitude  is  enforced 
by  the  bankers,  who  decline  to  underwrite  securities  in 
which  the  legal  formalities  have  not  been  complied  with. 
This  preliminary  work  must  be  done  before  the  attitude 
of  the  Commission  has  been  ascertained,  and  it  may  often 
happen  that  a  denial  by  the  Commission  renders  all  the 
preliminary  steps  futile.  An  illustration  of  such  an  out- 
come is  found  in  the  first  application  of  the  Burlington 
road.  Disapproval  of  the  capitalization  plan  made  it 
necessary  for  the  management  and  its  financial  advisers, 
after  consuming  months  in  complying  with  the  technical 
requirements  of  state  laws,  to  begin  their  work  over  again. 
This  lack  of  co-ordination  between  state  and  federal 
authorities  will  continue  so  long  as  there  is  any  doubt  as 
to  the  legal  power  of  the  federal  commission  to  override 
state  law.  No  corporation  can  afford  to  have  its  securi- 
ties tainted  by  doubt  as  to  their  validity.  But  the  ques- 
tion of  the  constitutionality  of  the  Commission's  power 
has  not  yet  been  raised. 

Not  only  is  the  Commission  concerned  with  the  emis- 
sion of  securities  but,  of  far  more  significant  public 
interest,  it  has  to  do  with  the  manner  in  which  the  pro- 
ceeds are  employed.  The  use  to  which  the  proceeds  are 
to  be  put  must  be  given  in  the  application.  The  Com- 
mission defines  and  limits  this  use  in  its  grant,  and  pen- 
alties, which  include  the  voiding  of  the  issue  and  fine 
and  imprisonment  for  the  carrier's  agent,  are  imposed 
for  departure  from  the  Commission's  authorization.  To 
assist  in  the  enforcement  of  the  section,  it  is  made  manda- 
tory upon  the  Commission  to  require  reports  which  show 
in  detail  the  disposition  of  the  securities  and  the  appli- 
cation of  the  proceeds. 

As  a  protest  against  the  evils  of  intercorporate  juggling 


294  RAILROADS  AND  GOVERNMENT 

and  the  abuses  of  corporate  management,  it  is  provided 
that  after  December  31,  1921,  it  shall  be  unlawful  for  a 
person  to  be  an  officer  or  director  of  more  than  one  carrier 
without  the  permission  of  the  Commission,  and  without  a 
showing  that  neither  public  nor  private  interests  will  be 
affected  thereby.  Furthermore,  no  officer  or  director 
can  benefit  directly  or  indirectly  from  the  sale  or  hypothe- 
cation of  securities  or  share  in  any  of  the  proceeds; 
neither  can  he  participate  in  dividends  from  funds  prop- 
erly included  in  capital  account.  These  offenses  are 
made  misdemeanors  punishable  by  fine  and  imprison- 
ment. So  far  as  interlocking  directorates  are  concerned, 
the  Commission  is  likely  to  permit  continuance  of  the 
practice  in  the  relations  of  parents  and  subsidiaries  where 
the  public  interest  will  be  promoted  by  proper  system 
unification,  but  to  discourage  the  practice  where  the  ob- 
vious purpose  is  to  restrain  competition  and  to  form  an 
offensive  and  defensive  alliance.  In  other  words,  the 
guiding  policy  must  be  sought  in  the  underlying  philoso- 
phy of  all  of  our  legislation  relating  to  combinations  and 
agreements — the  Sherman  Anti-Trust  Act,  the  Clayton 
Act,  and  the  Interstate  Commerce  Act — that  competi- 
tion must  not  be  unduly  restrained  nor  must  there  be 
any  tendency  to  create  a  monopoly. 

It  is  merely  a  reiteration  of  a  fundamental  tenet  of 
corporation  finance  that  dividends  should  not  be  paid 
out  of  capital.  However,  it  is  a  somewhat  different  thing 
to  make  such  a  practice  a  criminal  offense.  Forbidding 
directors  to  profit  in  any  way  from  the  sale  or  hypothe- 
cation of  securities  will  automatically  exclude  from  rail- 
road directorates  all  representatives  of  banking-houses 
that  are  acting  as  fiscal  agents  for  carriers.  This  is  one 
of  the  "reforms"  that  has  frequently  been  demanded  by 
an  outraged  public  which  has  become  suddenly  aware  of 
financial  juggling  that  has  wrecked  the  service  upon 
which  they  have  depended.  Bankers  have  many  times 


FEDERAL  REGULATION  OF  CAPITALIZATION  295 

been  discovered  to  have  been  the  guiding  spirits,  but 
attempts  at  reparation  through  the  courts  have  always 
failed.  Methods  of  procedure  guided  by  well-paid  coun- 
sel in  which  no  traces  are  left  behind,  combined  with 
failing  memories,  have  been  sufficient  to  save  these  men 
from  prosecution.  But  the  exclusion  of  banking  repre- 
sentatives from  railroad  boards  will  have  an  effect  not 
wholly  favorable.  Many  of  these  men  in  their  capacity 
as  fiscal  agents  are  wise  in  counsel.  They  represent  a 
mass  of  potential  credit  that  can  be  drawn  upon  by  the 
railroad  as  needed.  It  is  a  question  whether  funds  will 
be  as  readily  forthcoming  if  the  representative  of  the 
creditors  has  no  seat  upon  the  board. 

It  is  to  be  regretted  that  Congress  did  not  take  advan- 
tage of  this  favorable  opportunity  to  extend  the  jurisdic- 
tion of  the  Commission  over  holding  companies,  an 
authority  which  should  embrace  their  accounting  systems 
and  reports,  the  issuance  of  securities  and  the  nature 
of  their  relation  to  their  subsidiaries.  Doubt  as  to  the 
constitutionality  of  such  a  step  probably  stayed  the 
hand  of  Congress,  but  the  end  was  one  much  to  be 
desired. 

Many  validations  of  securities  have  been  effected  by 
the  Commission  since  the  new  law  went  into  effect, 
although  no  complete  report  is  yet  available.  Beyond 
making  use  of  the  guides  to  action  laid  down  in  the 
statute,  the  Commission  has  not  yet  worked  out  any  defi- 
nite code  of  procedure.  However,  two  cases  should  be 
referred  to  here  as  revealing  the  attitude  which  the  Com- 
mission is  assuming  toward  one  of  the  most  vigorously 
disputed  questions  in  corporation  finance,  the  right  both 
legal  and  equitable  of  a  public-service  corporation  to 
capitalize  its  surplus  by  the  issuance  of  stock  and  bond  I  p^ 
dividends.  These  two  cases  involve  two  of  the  most 
prosperous  roads  in  the  country.  The  first  case  was  an 
application  of  the  Chicago,  Burlington,  and  Quincy 


296  RAILROADS  AND  GOVERNMENT 

Railroad1  to  issue  a  stock  dividend  of  $60,000,000  and 
a  bond  dividend  of  $80,000,000  with  which  to  assist  the 
Great  Northern  and  the  Northern  Pacific,  owners  of 
nearly  97  per  cent  of  its  stock,  in  refunding  the  joint 
bonds  issued  in  1901  for  the  purchase  of  the  Burlington 
road.  It  possessed  a  book  surplus  of  $219,000,000  with 
an  actual  surplus  much  in  excess  of  this  figure.  Its 
average  dividend  had  been  in  excess  of  8  per  cent.  The 
other  case  was  that  of  the  Delaware,  Lackawanna  and 
Western  Railroad,2  which  requested  permission  to  capi- 
talize in  stock  its  entire  surplus  amounting  to  $90,000,000 
in  connection  with  negotiations  for  the  disposal  of  its 
mining  properties.  Its  average  dividend  since  1853  had 
been  nearly  13  per  cent,  and  it  had  distributed  annual 
cash  dividends  varying  from  20  per  cent  to  72  per  cent. 
It  had  practically  no  bonded  debt  except  that  of  its  leased 
lines.  Factors  local  to  each  situation  played  a  part  in 
the  decisions  of  the  Commission,  but  we  are  concerned 
here  only  with  the  one  question  of  fundamental  interest. 
So  far  as  the  issuance  of  bond  dividends  is  concerned, 
while  there  was  division  of  opinion  in  the  Commission 
as  to  the  propriety  of  drawing  a  distinction  between 
bonds  and  stock,  the  majority  denied  the  request  on  the 
ground  that  a  corporation  was  not  justified  in  incurring 
additional  fixed  obligations  without  a  showing  of  result- 
ing benefit.  However,  such  a  practice  is  so  unique 
that  this  part  of  the  decision  will  have  little  effect  upon 
financial  procedure.  Not  so  with  stock.  It  has  been 
repeatedly  claimed  by  shippers  in  rate  cases  and  by 
many  thoughtful  students  of  the  problem,  that  when  a 
carrier  secures  earnings  above  reasonable  dividends  and 
invests  them  in  the  property,  the  public,  which  has  pro- 
vided these  funds  through  the  payment  of  the  rates,  has 
an  interest  in  the  property,  and  cannot  be  asked  again  to 

1 1.  C.  C.  Finance  Docket  No.  1069  (February  28,  1921). 
*I.  C.  C.  Finance  Docket  No.  65  (April  18,  1921). 


FEDERAL  REGULATION  OF  CAPITALIZATION  297 

pay  a  return  upon  it.  Such  property  is  different  from 
that  created  by  the  investments  of  the  stockholders. 
It  should  not  be  capitalized,  or,  if  it  is,  the  carrier,  taking 
account  of  the  manner  of  its  accumulation,  should  share 
the  benefits  with  the  public.  The  fact  that  this  surplus 
is  the  property  of  the  carrier  is  not  a  sufficient  reason  for 
demanding  a  return  upon  it,  because  no  property  right 
is  unlimited,  and  this  property  has  been  devoted  to  a  use 
in  which  the  public  has  an  interest.  The  fact  that  the 
surplus  earnings  might  have  been  distributed  currently 
to  the  stockholders  as  dividends  is  no  defense,  because 
there  is  no  assurance  that  the  high  dividend  rate  thereby 
created  would  have  been  tolerated  by  the  public. 

So  runs  the  argument,  and  its  reasoning  would  be  in- 
controvertible were  it  not  that  the  railroads  have  been 
regulated  as  to  their  charges  for  at  least  fifteen  years. 
The  majority  of  the  Commission,  in  granting  in  part 
the  requests  for  the  right  to  capitalize  surplus  in  the 
form  of  stock  dividends,  declared  that  there  was  no  proof 
that  the  income  sought  to  be  capitalized  had  resulted 
from  excessive  rates.  Traffic  had  been  carried  at  rates 
controlled  by  state  or  interstate  regulating  bodies  which 
were  substantially  the  same  as  those  applied  to  competing 
lines.  Nor  did  the  Commission  find  that  the  return  on 
the  property  value  was  excessive.  Accordingly,  in  both 
instances  the  decision  in  favor  of  the  issue  of  stock  divi- 
dends was  found  to  be  consistent  with  specific  statutory 
requirements.  It  is  interesting  in  this  connection  to 
find  the  Lackawanna  openly  advancing  as  one  of  the 
arguments  for  a  stock  dividend  that  the  declaration  of 
as  high  a  dividend  as  the  20  per  cent  now  prevailing 
leads  the  public  to  conclude  that  the  applicant  is  receiv- 
ing an  excessive  return  on  its  investment.  In  other 
words,  the  federal  commission  is  publicly  requested  to 
authorize  a  100  per  cent  watered-stock  issue  in  the  hope 
that  it  will  allay  tne  hostility  of  an  uninformed  public ! 


298  RAILROADS  AND  GOVERNMENT 

In  reply  to  the  argument  that  the  earnings  of  a  public- 
service  corporation  beyond  a  reasonable  return  to  capi- 
tal are  not  the  absolute  possession  of  the  carrier  but  are 
at  least  the  property  of  a  partnership  in  which  the  pub- 
lic shares,  the  majority  of  the  Commission  are  hardly  on 
secure  ground.  Their  position  as  stated  in  the  Lacka- 
wanna  Case  is  as  follows: 

"The  question  of  the  reasonableness  of  applicant's 
past  return  is  not  in  fact  before  us  at  this  time.  Where 
the  public  has  found  it  expedient  to  adopt  a  laissez-faire 
policy  to  encourage  utility  development,  it  cannot  be 
said  that  profits  have  been  illegally  collected  in  the  ab- 
sence of  regulation.  The  title  to  the  surplus  has  vested 
without  limitation  or  condition  in  the  corporation  and 
benefits  the  shareholder.  The  doctrine  of  implied  trust 
sometimes  applied  by  courts  and  commissions  to  donated 
property  has  no  application  to  excessive  return,  for  the 
payment  of  rates  carried  with  it  no  requirement  that  the 
funds  be  left  in  the  business  or  used  for  the  public  benefit. 
Its  strained  application  to  carriers  who  have  made  addi- 
tions and  betterments  from  surplus  would  only  penalize 
those  who  came  nearest  to  benefiting  the  public.  The 
surplus  from  income  was  unrestricted  legal  property 
of  the  company,  and  ceased  to  be  funds  of  the  public, 
before  the  decision  to  divert  it  to  either  dividends  or 
additions  and  betterments  was  made." 

This  may  be  good  law,  but  certainly  there  can  be  no 
universal  acceptance  of  the  idea  that  in  the  case  of  a 


public  service  in  which  the  investor  has  been  amply 
rewarded  excess  earnings  are  the  unrestricted  possession 
of  the  carrier,  to  do  with  them  as  it  sees  fit. 

One  other  point  of  general  interest  is  developed  in 
these  two  cases;  namely,  the  recognition  by  the  Com- 
mission that  a  substantial  surplus  is  essential  to  an  ade- 

v 


FEDERAL  REGULATION   OF  CAPITALIZATION  299 

quate  protection  of  the  public  welfare.  In  neither  of 
the  cases  did  the  Commission  authorize  the  full  amount 
asked  for,  and  in  both  cases  it  was  solicitous  that  the 
amount  retained  in  surplus  account  should  be  sufficient 
to  provide  for  emergencies,  support  borrowing  power, 
afford  insurance  against  obsolescence,  provide  the  neces- 
sary investments  in  non-revenue-producing  property, 
minimize  short-term  financing,  and  serve  as  a  general 
financial  balance-wheel.  It  is  in  reasoning  of  this  kind 
that  the  Commission  will  perform  its  great  service  for 
railroad  finance  in  the  future.  Its  authority  will  carry 
weight  with  the  public  and  its  administrative  prestige  and 
legal  position  will  influence  the  Supreme  Court.  In  spite 
of  the  disastrous  effects  of  our  long  years  of  neglect,  it 
is  still  not  too  late  to  accomplish  constructive  results 
of  enduring  public  value. 


CHAPTER  XXI 

ADMINISTRATIVE   POWERS 

i.     Service 

As  already  described,  the  Commission's  first  venture 
into  the  field  of  management  beyond  that  of  enforcing 
the  various  safety  provisions,  resulted  from  the  passage 
of  the  Esch  Law  in  1917,  which  gave  control  over  car- 
service.  Experience  during  the  period  of  federal  con- 
trol with  unified  direction  of  car-service  was  so  satisfac- 
tory that  the  Commission  urged  an  increase  in  its  power 
which  should  perpetuate  the  benefits  of  unification  after 
the  roads  had  been  returned  to  their  owners.  Moreover, 
even  before  the  exigencies  of  war  traffic  demanded  the 
step,  it  had  become  clear  that  federal  regulation  of  car- 
service  was  a  necessity  if  discrimination  was  to  be  avoided. 
For  competition  in  service  usually  means  a  somewhat 
shiftless  observance  of  rules  concerning  reconsignment, 
demurrage,  and  similar  privileges.  Moreover,  compe- 
tition acts  as  an  incentive  to  the  retention  and  improper 
use  of  cars  belonging  to  other  carriers.  Voluntary  agree- 
ments between  carriers  had  failed  at  times  to  prevent  seri- 
ous disturbance  of  a  normal  car  distribution  and  there 
was  no  authority,  once  the  situation  was  abnormal,  that 
could  restore  a  proper  balance.  Neither  was  there  any 
power  to  compel  any  carrier  to  equip  itself  with  cars  and 
thus  rid  itself  of  the  desire  to  steal  from  others.  Control 
was  demanded  over  interchange  and  return  of  cars  and 
the  compensation  for  their  use.  Again,  if  embargoes 
were  to  be  erected  against  the  receipt  of  freight,  the 

300 


ADMINISTRATIVE  POWERS  30! 

power  of  determination  should  not  rest  with  the  indi- 
vidual carrier.  An  embargo  is  a  refusal  to  accept.  No 
agency  should  be  permitted  to  exercise  this  privilege 
without  official  sanction. 

In  1918  the  Commission  completed  an  elaborate  in- 
vestigation of  the  private-car  problem.1  Backed  both  by 
the  law  as  amended  in  1906,  which  gave  it  power  over 
contracts  signed  by  the  railroads  with  private-car  com- 
panies, and  by  the  Car  Service  Act  of  1917,  the  Com- 
mission, upon  the  information  derived  from  its  investi- 
gation, prescribed  rates  and  methods  of  payment  for 
private  cars  and  regulations  for  their  use.  It  decided 
that  it  was  to  the  interest  of  carriers  and  public  that  the 
operation  of  private  cars  should  continue  under  proper 
regulation.  Apparently  the  time  had  not  yet  come  when 
railroads  were  to  be  required  to  own  the  equipment  of 
all  kinds  needed  in  the  performance  of  their  service. 

The  Act  of  1920  clarified  and  extended  the  Commis- 
sion's power.2  The  term  "car-service"  over  which  the 
authority  of  the  Commission  prevailed  was  extended  to 
include  the  "use,  control,  and  supply"  as  well  as  the 
movement  of  equipment,  and  to  comprise  locomotives 
and  special  equipment  as  well  as  cars.  It  was  specifically 
made  the  duty  of  each  carrier  to  furnish  safe  and  ade- 
quate car-service,  but  any  extension  of  service  must 
reasonably  be  required  in  the  public  interest  and  must 
not  involve  an  expense  that  would  impair  the  ability  of 
the  carrier  to  perform  its  duty  to  the  public.  More- 
over, every  carrier  was  required  to  make  a  reasonable 
and  just  distribution  of  cars  to  the  coal  mines  and,  fol- 
lowing the  ruling  of  the  Commission  and  the  court  in 
the  Illinois  Central  Case,  to  count  in  the  rating  of  the 

1  50  I.  C.  C.,  652.     This  report  contains  a  very  satisfactory  history 
of  the  relation  of  railroads  to  the  companies  furnishing  their  own 
cars. 

2  Sec.  I  (10-17). 


302  RAILROADS  AND  GOVERNMENT 

mine  every  car  used,  whether  owned  by  the  mine  or  the 
carrier.1 

But  the  provision  of  the  greatest  public  interest  and 
importance  was  tnat  which  gave  the  Commission  power, 
whenever  it  believed  that  a  shortage  of  equipment  or 
congestion  of  traffic  or  any  other  emergency  requiring 
immediate  action  existed,  upon  complaint  or  on  its  own 
initiative  and  with  or  without  a  hearing,  to  make  such 
directions  with  regard  to  the  relations  of  the  property 
of  carriers  as  should  promote  the  public  service.  This 
extended  to  the  joint  use  of  terminals,  to  preference  or 
priority  in  transportation,  to  embargoes,  to  the  issuance 
of  permits.  Moreover,  if  the  Commission  was  of  the 
opinion  that  a  carrier  for  any  reason  was  unable  to  satis- 
factorily transport  the  traffic  offered  to  it,  it  might  pre- 
scribe how  the  traffic  should  be  handled  and  might  dis- 
tribute it  over  other  lines.  Thus  was  a  genuine  attempt 
made  to  preserve  some  of  the  benefits  of  unified  opera- 
tion during  federal  control. 

The  new  machinery  was  promptly  brought  into  ac- 
tion.2 When  the  roads  went  back  on  March  i,  1920, 
there  was  a  scarcity  of  cars  which  was  greatly  increased 
a  month  later  by  strikes  that  tied  up  equipment  and  re- 
duced the  available  supply  by  one-third.  In  May  the 
carriers  petitioned  the  Commission  to  exercise  its  emer- 
gency powers  in  order  that  essential  products  might  be 
moved,  such  as  foodstuffs,  coal,  and  news-print  paper. 
The  Commission  responded  by  the  issuance  of  a  series  of 
orders  designed  to  make  the  greatest  available  use  of 

1  Power  is  given  to  the  Commission  to  make  rules  governing  special 
conditions  in  the  handling  of  live  stock.     Otherwise  the  rate  must 
cover  all  necessary  service  of  loading  and  unloading  at  public  stock- 
yards.    Section  15  (5). 

2  When  federal  control  ended,  both  the  Commission  and  the  car- 
riers restored  their  separate  car-service  bureaus,  which  now  keep  in 
constant  touch  with  each  other.     The  railroads  accept  from  their 
"Car-Service  Division"  directions  concerning  car  distribution,  and  the 
"Car-Service  Division"  as  agent  for  the  carriers  accepts  service  of 
orders  from  Bureau  of  Service  of  the  Commission. 


ADMINISTRATIVE   POWERS  303 

existing  equipment.  Traffic  was  to  be  forwarded  by  the 
most  available  route  irrespective  of  shippers'  directions 
or  the  ownership  of  cars.  Relocation  of  empty  equip- 
ment was  promoted  by  sending  open-top  coal-cars  east- 
ward and  box  cars  westward,  and  the  confused  situation 
inherited  from  the  Railroad  Administration  was  ad- 
justed. Terminal  committees,  following  the  practice  of 
the  war  period,  were  organized  at  traffic  centres,  composed 
of  railroad,  shipping,  and  regulating  interests,  the  duty  of 
which  was  to  keep  gateways  open  and  to  advise  as  to 
requirements.  As  an  outcome  of  this  emergency  organi- 
zation the  Commission  plans  to  maintain  service  organi- 
zations at  points  where  congestion  is  likely  to  occur,  in 
order  to  develop  local  co-operation  with  the  operating 
organizations  of  the  roads. 

Notwithstanding  the  urgent  request  of  the  carriers, 
the  Commission  declined  to  exercise  its  priority  powers 
except  with  reference  to  the  distribution  of  bituminous 
coal.  Here  the  crisis  was  so  acute  that  it  took  radical 
action,  and  in  the  case  of  the  New  England  supply  and 
that  for  the  Northwest  via  the  Lakes,  it  resurrected  the 
pooling  arrangements  that  had  been  employed  by  the 
war  administration.  Finally,  in  ways  which  do  not 
publicly  appear,  the  Commission  through  its  Bureau  of 
Service  is  now  working  to  increase  operating  efficiency. 
It  is  in  a  position  to  exert  a  powerful  influence  in  the 
years  to  come  upon  the  efficient  loading  of  cars  and 
trains  and  the  daily  mileage  made,  and  its  oversight 
should  be  in  the  direction  of  greater  co-operation  of 
individual  units  and  a  closer  weaving  of  these  operating 
units  into  a  nation-wide  system. 

It  has  already  been  stated  that  the  Commission  may, 
in  time  of  emergency,  require  joint  use  of  terminal  facili- 
ties. But  its  power  goes  further.  Whenever  the  Com- 
mission finds  it  to  be  practicable  and  in  the  public  inter- 
est and  not  likely  to  impair  the  owning  carrier's  ability 
to  handle  its  own  business,  it  has  power  to  require  the 


304  RAILROADS  AND   GOVERNMENT 

use  of  the  terminal  by  other  carriers  and  to  determine 
the  compensation  in  case  the  carriers  cannot  agree. 

Moreover,  no  carrier  subject  to  the  Act  can  now  under- 
take an  extension  or  a  new  line  of  road  or  acquire  or  op- 
erate such  a  road  without  first  obtaining  from  the  Com- 
mission a  certificate  of  public  convenience  and  necessity. 
Neither  can  a  line  be  abandoned  without  the  Com- 
mission's certificate.  Notice  of  application  must  be  filed 
with  the  Governor  of  each  state  concerned  and  the 
right  of  the  state  to  be  heard  must  be  recognized.  Also 
notice  must  be  published  for  three  consecutive  weeks  in 
a  newspaper  in  each  county  through  which  the  railroad 
operates.  This  is  the  extent  of  power  reserved  to  the  in- 
dividual states.  The  certificate  issued  by  the  Commis- 
sion is  final. 

2.    Accounting  and  Statistics 

It  will  be  recalled  that  up  to  1920  no  regulations  had 
been  issued  by  the  Commission  prescribing  specific  de- 
preciation rates,  but  that  the  carriers  had  been  required 
to  set  up  rates  based  upon  their  own  experience,  which 
they  were  prepared  to  justify.  The  new  law  imposes  a 
specific  mandate  upon  the  Commission  requiring  it  as 
soon  as  practicable  to  prescribe  the  classes  of  property 
for  which  depreciation  charges  are  to  be  set  up,  and  the 
rates  to  be  used,  and  carriers  are  required  to  confine  their 
depreciation  charges  to  these  classes  of  property  and  to 
these  rates.  The  Commission  has  organized  a  special 
section  in  its  office  which  is  giving  its  time  to  working 
out  the  detailed  requirements  of  this  amendment.  Its 
results  should  be  of  importance  in  the  administration  of 
the  valuation  section  of  the  Act  and  in  keeping  the  value 
of  the  railroads  up  to  date. 

The  visitorial  power  of  the  Commission  was  strength- 
ened in  1920  by  authorizing  it  at  all  times  to  have  access 


ADMINISTRATIVE  POWERS  305 

\  y. 

\  A    •U-- 

not  only  to  "all  accounts,  records,  and  memoranda," 
but  also  to  all  "documents,  papers,  and  correspondence 
now  or  hereafter  existing."  In  1915  the  Louisville  and  jjr 
Nashville  Railroad  had  refused  permission  to  examiners 
of  the  Commission  to  consult  correspondence  in  its  files 
which  was  believed  to  contain  evidence  that  would  show 
whether  or  not  it  had  violated  the  Act.  This  refusal 
was  sustained  by  the  Supreme  Court  on  the  ground  that 
the  wording  of  the  Act  did  not  contemplate  the  inclusion 
of  correspondence.1  This  seriously  hampered  the  work 
of  the  Commission,  as  it  is  in  the  files  of  the  carrier  that 
"the  most  definite  evidence  of  criminal  intent  is  com- 
monly to  be  found."  In  the  same  year,  the  Supreme 
Court  had  ruled  that  a  mere  "fishing  expedition  into  the 
affairs  of  a  stranger  for  the  chance  that  something  dis- 
creditable might  turn  up"  is  not  permissible,  but  ques- 
tions having  a  real  bearing  on  the  issue  must  be  answered 
when  within  the  Commission's  jurisdiction.2 

The  broad  and  sweeping  power  of  investigation  now 
conferred  is  clearly  justified  if  we  concede  that  the  car- 
riers are  public  agencies  pure  and  simple.  It  was  this 
same  Louisville  and  Nashville  Railroad  that  refused  in 
1917  to  answer  questions  concerning  the  expenditure  of 
its  funds  for  political  purposes,  and  was  compelled  to  do 
so  by  the  Supreme  Court.  It  was  held  in  that  case  that 
in  any  political  activities  or  efforts  to  suppress  compe- 
tition both  of  which  were  here  involved,  the  public 
authority  was  justifiably  interested  in  how  the  sums  ex- 
pended were  charged  in  the  accounts.  This  was  a  public 
matter  which  could  not  be  withheld.  Said  the  court: 
"If  it  be  grasped  thoroughly  and  kept  in  attention  that 
they  are  public  agents,  we  have  at  least  the  principle 
which  should  determine  judgment  in  particular  instances 
of  regulation  or  investigation;  and  it  is  not  far  from 
true — it  may  be  it  is  entirely  true,  as  said  by  the  Com- 

i236U.  S.,  318.  '237  U.S.,  434. 


306  RAILROADS   AND   GOVERNMENT 

mission — that  '  there  can  be  nothing  private  or  confiden- 
tial in  the  activities  and  expenditures  of  a  carrier  en- 
gaged in  interstate  commerce.'  "  * 

As  a  comment  on  the  propagandist  activities  of  car- 
riers which  have  become  such  a  feature  in  recent  years, 
and  as  an  answer  to  the  oft-heard  query  whether  such 
activities  are  a  proper  burden  on  the  rates  paid  by  the 
public,  the  concluding  words  of  this  opinion  are  of  inter- 
est: "Abstractly  speaking,  we  are  not  disposed  to  say 
that  a  carrier  may  not  attempt  to  mould  or  enlighten 
public  opinion,  but  we  are  quite  clear  that  its  conduct 
and  the  expenditures  of  its  funds  are  open  to  inquiry. 
If  it  may  not  rest  inactive  and  suffer  injustice,  it  may 
not,  on  the  other  hand,  use  its  funds  and  its  power  in 
opposition  to  the  policies  of  government" — whatever  that 
may  mean. 

Regulations  issued  by  the  Bureau  of  Statistics  requir- 
ing apportionment  of  expenses  between  passenger  and 
freight  service,  which  were  suspended  during  the  war 
period  at  the  request  of  carriers,  have  been  revived  and 
amended  and  made  effective  as  of  January  i,  1920.  The 
Commission  is  contemplating  a  still  further  step  in  cost 
accounting  by  way  of  a  requirement  for  the  separation 
of  terminal  costs  from  those  of  road  or  line  service.  If 
this  can  be  satisfactorily  accomplished  it  will  mean  a 
distinct  step  in  advance  toward  the  eventual  shaping  of 
a  scientific  rate  structure  based  on  the  facts  of  operation. 
We  have  too  long  blundered  along  blindly,  and  have 
somehow  managed  to  come  out  with  the  financial  bal- 
ance on  the  right  side.  But  with  the  narrow  margins  of 
profit  that  must  prevail,  now  that  we  have  reached  the 
intensive  stage  of  railroading,  and  with  the  closer  super- 
vision of  Government  and  the  greater  degree  of  accounta- 
bility by  the  carrier  to  the  public,  there  must  be  a  more 
U.  S.,  33,  47,  48  (191?). 


ADMINISTRATIVE  POWERS  307 

scientific  analysis  of  costs  and  a  clearer  justification  of 
charges.  Regulation  cannot  fail  to  be  aided  by  it. 
The  enforcement  of  such  provisions  in  the  law  as  the 
amendment  to  Section  4  providing  that  in  cases  of  sus- 
pension of  the  distance  principle  the  long-haul  rate  shall 
be  reasonably  compensatory  would  be  assisted  by  some 
adequate  analysis  of  costs  of  operation.  One  need  not 
believe  in  the  cost  theory  of  rate  making  in  order  to  ad- 
vocate more  scientific  price  fixing  by  our  transportation 
agencies. 

For  these  same  reasons  one  must  welcome  the  move- 
ment on  the  part  of  the  Bureau  of  Statistics  for  the 
accumulation  of  commodity  statistics  that  will  actually 
show  volume  of  traffic  in  the  case  of  important  commodi- 
ties for  different  sections  of  the  country  and  for  different 
railroad  systems.  It  is  a  curious  fact  that  although 
financial  and  operating  statistics  have  improved  steadily, 
almost  nothing  has  been  done  to  develop  commodity 
statistics,  largely  because  the  carriers  have  insisted  that 
the  expense  would  be  prohibitive.  Yet  many  of  them 
accumulate  the  material  for  their  own  use.  On  Decem- 
ber i,  1919,  a  classification  of  commodities,  consisting  of 
seventy  different  items,  was  adopted  by  the  Commis- 
sion, and  quarterly  reports  are  now  called  for  under  this 
classification.  Special  experimental  studies  have  been 
made  showing  additional  information,  such  as  the  revenue 
from  each  class  of  commodities  and  the  states  of  origin 
and  destination.  These  studies  may  later  be  developed 
into  current  reports.  Such  material  when  currently 
available  will  be  of  inestimable  value  to  the  Commission 
in  making  rates.  It  will  no  longer  be  obliged  to  rely 
upon  ex-parte  material  furnished  by  the  litigants,  but 
will  possess  in  its  own  files  information  currently 
gathered  upon  which  it  may  with  reasonable  confidence 
rely. 


308 


RAILROADS  AND   GOVERNMENT 


The  Commission's  statistical  work  was  considerably 
extended  by  its  inheritance  of  the  system  of  reports 
developed  by  the  statistical  division  of  the  Railroad 
Administration  during  the  war,  which  carry  into  greater 
detail  than  before  the  statistical  material  having  to  do 
with  the  special  units  of  operation  such  as  train,  car,  and 
ton  miles.  Account  should  also  be  taken  of  the  new 
classification  of  employees  worked  out  co-operatively  by 
the  Commission  and  the  Railroad  Labor  Board.  The 
latter  organization  soon  found  its  duties  in  prescribing 
wages  and  working  conditions  seriously  hampered  by 
lack  of  a  uniform  terminology  or  any  clearly  defined 
basis  for  the  classification  of  employees.  Accordingly,  a 
classification  was  constructed  on  a  functional  basis  which 
was  made  effective  by  the  Interstate  Commerce  Com- 
mission, April  18,  1921,  as  a  standard  form  for  reporting 
all  wage  data.  The  use  of  standardized  nomenclature 
makes  possible  more  accurate  comparisons  with  similar 
occupations  outside.  This  task,  brought  to  completion 
under  pressure  of  labor  controversies,  realizes  a  long-felt 
need  for  more  accurate  wage  data,  and  is  another  step 
in  perfecting  the  statistical  output  of  the  Commission. 

3.    Cash  Payment  of  Freight  Bills 

Section  3  was  amended  by  requiring  that  no  carrier 
after  July  i,  1920,  should  relinquish  freight  at  destina- 
tion until  all  charges  had  been  paid,  except  under  regula- 
tions that  the  Commission  might  prescribe  to  assure 
prompt  payment.  The  policy  of  cash  payment  for 
freight  transportation  was  inaugurated  during  federal 
control  under  an  order  of  the  Director-General  dated 
May  20,  1918.  The  evil  of  discrimination  through  the 
granting  of  credit  to  shippers  had  grown  to  serious  pro- 
portions, large  shippers  often  enjoying  weeks  and  months 
of  exemption  in  which  to  sell  their  goods  and  pay  their 


ADMINISTRATIVE  POWERS  309 

transportation  charges.  Under  competition  there  seemed 
to  be  no  way  of  checking  the  evil.  The  voluntary  ac- 
tion of  the  Federal  Railroad  Administration  has  now  in 
effect  been  incorporated  into  law. 


CHAPTER  XXII 

REGULATION   OF   WAGES   AND   WORKING   CONDITIONS 

THE  most  serious  problem  that  the  railroads  inherited 
from  the  United  States  Railroad  Administration  was  that 
which  concerned  their  labor.  Morale  had  broken  down. 
If  the  individual  railroad  was  to  operate  efficiently,  the 
local  discipline  had  speedily  to  be  restored.  Large  num- 
bers of  employees  were  now  members  of  unions  who  had 
before  the  war  no  such  affiliations,  and  many  unions  were 
in  existence  where  none  at  all  had  existed  before.  These 
labor  organizations  were  immensely  strengthened  by  the 
possession  of  agreements  operating  nationally  which  for 
reasons  to  be  soon  discussed  did  not  terminate  with  the 
end  of  federal  control.  Finally,  insistent  and  unsettled 
demands  for  wage  increases  had  been  passed  on  as  a 
heritage  to  the  carriers. 

It  will  be  necessary  first  to  observe  to  what  degree 
Congress  assisted  in  the  solution  of  this  labor  problem 
by  providing  adjustment  machinery.  The  debates  in 
Congress  and  the  struggle  between  the  proponents  of 
the  conflicting  points  of  view  furnish  valuable  reading 
for  the  student  of  labor  literature.  Many  "solutions" 
were  discussed,  but  only  two  that  failed  of  enactment 
will  be  mentioned  here.  The  first  was  the  "anti-strike" 
provision  of  the  Senate  bill,  which  made  it  unlawful  for 
any  two  or  more  officials  or  employees,  for  the  pur- 
pose of  maintaining  or  adjusting  a  dispute  which  could 
be  submitted  to  the  agencies  provided  by  the  Act,  to 
enter  into  an  agreement  to  hinder  or  prevent  the  op- 
eration of  trains,  and  for  any  one  to  aid  or  abet  in 
this  action.  Such  illegality  was  declared  to  be  a  mis- 

310 


REGULATION   OF  WAGES  AND  WORKING  CONDITIONS     311 

demeanor  punishable  by  fine  and  imprisonment.  But 
nothing  was  to  prevent  an  individual  from  quitting  his 
employment  for  any  reason.  This  revolutionary  pro- 
posal failed  partly  because  of  the  bitter  opposition  of 
labor,  not  only  railroad  labor,  but  also  the  American 
Federation  represented  by  Mr.  Gompers,  which  declared 
it  an  enactment  imposing  involuntary  servitude.  But 
more  than  this,  it  gave  an  impression  of  sharp  practice 
and  unfairness.  Labor  had  been  drafted  into  the  Gov- 
ernment service  as  a  war  measure,  had  served  patri- 
otically, had  refrained  from  extreme  measures  in  seeking 
its  ends,  and  had  in  fact  accepted  less  in  wages  than  it  was 
entitled  to.  And  this  bill  proposed,  before  labor  should 
again  be  free  of  the  shackles  of  Government  control,  to 
make  it  impossible  for  it  to  resort  to  the  means  which  it 
had  always  felt  free  under  private  operation  to  employ. 
The  proposal  passed  the  Senate  but  failed  in  conference. 
An  attempt  to  substitute  for  it  in  the  Senate  the  Cana- 
dian plan,  under  which  a  strike  should  be  illegal  until 
sixty  days  after  the  decision  of  a  wage  tribunal,  failed 
of  passage  by  a  tie  vote. 

In  the  House,  the  supporters  of  labor  succeeded  in 
having  incorporated  in  the  Esch  Bill  provisions  which  in 
substance  perpetuated  the  adjustment  machinery  of  the 
war  period.  There  were  to  be  three  bipartisan  adjust- 
ment boards,  composed  equally  of  employers  and  em- 
ployees, with  appeal  to  corresponding  bipartisan  commit- 
tees on  labor  disputes.  A  majority  vote  was  necessary  for 
settlement.  There  was  no  enforcement  machinery  pro- 
vided, reliance  being  placed  on  publicity.  The  public  had 
no  representation  on  the  boards.  It  was  a  plan  entirely 
consistent  with  the  general  development  of  labor  policy. 
The  goal  was  complete  unionization  of  labor,  followed  by 
negotiation  on  a  national  scale  between  representatives  of 
labor  and  capital.  It  certainly  looked  in  the  direction  of 
the  closed  shop  in  the  railroad  business.  The  elimination 


312 


RAILROADS  AND   GOVERNMENT 


of  the  neutral  party  representing  the  public  was  easily  ex- 
plained in  the  light  of  experience.  Such  arbitrations  as 
had  been  conducted  had  not  proved  satisfactory  to  labor 
for  reasons  already  discussed.  Labor  had  no  desire  to 
crystallize  this  unfortunate  experience  into  law.  It  is 
not  without  significance  that  the  bill  confirmed  for  the 
future  all  the  orders  and  decisions  of  the  Railroad  Ad- 
ministration relating  to  wages,  hours,  and  conditions  of 
employment. 

Out  of  the  conflict  of  these  two  proposals  appeared  the 
labor  provisions  of  the  Act  of  1920.  They  combined  fea- 
tures of  both  measures.  Compulsory  arbitration  was 
eliminated.  Arbitration  without  power  of  enforcement 
was  provided.  The  bipartisan  boards  of  the  House  bill 
were  rejected,  but  provision  was  made  for  voluntary 
adjustment  boards. 

The  clauses  of  the  Act  of  1920  relating  to  labor  open 
with  the  announcement  that  it  is  the  duty  of  all  carriers 
and  their  employees  to  adopt  every  available  means  to 
avoid  interruption  of  operation  which  may  result  from  any 
dispute.  All  disputes  must  be  considered  and,  if  possible, 
decided  in  conference  between  representatives  of  the  two 
sides,  and  only  if  not  so  decided  are  they  to  be  carried 
higher.  Above  this  local  conference,  there  is  the  board  of 
labor  adjustment,  which  may  be  established  by  agreement 
between  a  single  carrier  and  its  employees  or  organization 
of  employees,  or  by  a  group  of  carriers,  or  by  the  car- 
riers as  a  whole  with  corresponding  employee  groups. 
Such  adjustment  board  is  to  have  appellate  jurisdiction 
over  any  dispute  not  settled  upon  the  individual  railroad 
that  involves  grievances,  rules,  and  working  conditions, 
but  not  wages.  It  takes  jurisdiction  upon  the  appeal  of 
the  representative  of  the  carrier  or  the  employee  organiza- 
tion on  the  individual  property,  or  the  written  petition 
of  100  unorganized  employees,  or  upon  its  own  motion,  or 
it  must  accept  jurisdiction  at  the  request  of  the  national 


REGULATION   OF  WAGES  AND  WORKING  CONDITIONS      313 

Labor  Board,  whenever  this  board  is  of  the  opinion  that 
the  dispute  is  likely  substantially  to  interrupt  commerce. 

Finally,  a  Railroad  Labor  Board  has  been  created  with 
national  jurisdiction.  It  has  nine  members,  three  repre- 
senting labor,  appointed  by  the  President  from  a  poll  of 
six  nominees  offered  by  the  employees,  three  representing 
the  corporations  similarly  appointed,  and  three  repre- 
senting the  public,  appointed  directly  by  the  President. 
This  board  has  jurisdiction  over  disputes  involving 
grievances  and  working  conditions  that  have  not  been 
settled  by  an  adjustment  board.  In  case  no  adjustment 
board  is  organized,  the  Labor  Board  receives  the  case 
directly  on  appeal  from  the  individual  railroad.  Disputes 
not  settled  locally  involving  questions  of  wages  go  in  all 
cases  direct  to  the  Labor  Board,  without  the  intermedi- 
ation of  any  regional  board,  and  the  Labor  Board  may 
on  its  own  motion  take  over  the  dispute  if  it  is  of  the 
opinion  that  commerce  is  likely  to  be  substantially  inter- 
rupted. Moreover,  any  decision  made  on  the  individual 
railroad  respecting  wages  may  be  suspended  by  the 
board,  if  it  appears  that  the  decision  is  likely  to  necessi- 
tate a  substantial  readjustment  of  wage  rates. 

As  a  guide  to  the  adjustment  of  disputes,  Congress 
laid  down  some  general  principles  which  have  apparently 
been  drawn  from  the  literature  of  railroad  arbitrations. 
Wages  and  working  conditions  are  to  be  just  and  reason- 
able. As  an  aid  in  determining  justness  and  reasona- 
bleness, the  boards  are  to  take  into  account,  among  other 
things,  the  following:  wages  paid  for  similar  work  in 
other  industries,  relation  of  wages  to  cost  of  living, 
hazard,  training  and  skill,  responsibility,  regularity  of 
employment,  and  inequalities  that  may  have  resulted 
from  previous  wage  adjustments. 

All  decisions  of  the  Labor  Board  must  have  the  con- 
currence of  a  majority,  and  in  case  of  wage  disputes  at 
least  one  of  the  public  members  must  concur  in  the  de- 


314  RAILROADS  AND   GOVERNMENT 

cision.  Decisions  are  made  public  by  transmittal  to 
the  President  and  to  the  Interstate  Commerce  Commis- 
sion, and  in  such  other  ways  as  the  board  decides.  If 
a  decision  is  violated,  the  board  may  upon  its  own  mo- 
tion hear  and  determine  the  violation  and  make  its  de- 
cision public.  Beyond  this  point  its  decisions  have  no 
sanction. 

This  was  the  organization  which  was  to  be  put  immedi- 
ately to  work  upon  the  wage  problem.  The  employees 
in  large  measure  had  awaited  "with  disciplined  and  pa- 
triotic patience"  the  reduction  of  living  costs,  and  had 
submitted  to  the  postponements  of  their  demands,  with 
the  consequence  that  the  new  board  received  requests  that 
dated  back  more  than  a  year.  At  the  suggestion  of  the 
President,  representatives  of  carriers  and  employee  organi- 
zations inaugurated  conferences  soon  after  the  passage  of 
the  Transportation  Act,  and  these  continued  until  April 
i,  but  all  to  no  purpose.  When  the  membership  of  the 
Railroad  Labor  Board  was  confirmed  by  the  Senate  on 
April  15,  it  was  at  once  imposed  with  the  burden  of  this 
wage  controversy,  involving  all  classes  of  labor,  2,000,000 
men,  and  an  area  of  national  extent.  Moreover,  the  ne- 
cessity for  speedy  decision  to  allay  discontent  which  was 
obvious  on  the  surface,  was  made  more  imperative  during 
the  course  of  the  negotiations  by  a  letter  from  the  Presi- 
dent urging  a  prompt  settlement.  It  was  an  accomplish- 
ment of  no  mean  proportions  to  render  a  decision  in  two 
months.  On  July  20,  1921,  increases  were  granted  aver- 
aging 22  per  cent  over  the  wages  of  the  Railroad  Admin- 
istration, and  amounting  in  the  aggregate,  according  to 
the  estimate  of  the  board,  to  about  $600,000,000  per 
year.  Back  pay  was  granted  to  May  i. 

It  is  not  surprising  to  discover  that  the  board  was 
unable  to  find  any  formula  for  a  just  and  reasonable 
wage.  Many  have  tried  before.  No  one  has  succeeded. 
"The  determination  of  such  wages,"  says  the  board, 


REGULATION  OF  WAGES  AND  WORKING  CONDITIONS     315 

"is  necessarily  a  matter  of  estimate  and  judgment." 
The  seven  conditions  laid  down  by  Congress  as  a  basis 
were  all  taken  into  consideration.  Hazard,  skill,  and 
responsibility  were  factors  that  were  supported  by  the 
evidence  of  both  employees  and  carriers.  Railroad  em- 
ployment was  found  to  be  more  regular  and  the  char- 
acter of  work  more  desirable  than  similar  employment 
outside.  Inequalities  in  previous  wage  adjustments  were 
a  factor  that  could  not  be  carefully  investigated  because 
of  lack  of  time.  As  for  cost  of  living,  it  could  not  be 
applied  with  any  degree  of  exactitude  to  different  parts 
of  the  country,  because  standardization  of  pay  had  pro- 
ceeded so  far  and  possessed  such  advantages  that  it  was 
deemed  inexpedient  to  disturb  it.  Yet  cost  of  living 
was  recognized  as  the  principal  ground  for  a  general 
increase.  It  was  found  that  the  wages  generally  were 
substantially  below  those  for  similar  work  outside,  and 
that  the  increase  in  cost  of  living  had  thrown  real  wages 
below  the  pre-war  standard. 

Of  course  cost  of  living  is  not  a  sound  basis  upon 
which  to  determine  the  reasonableness  of  wage  rates. 
It  begs  the  entire  question.  It  merely  indicates  that  an 
increase  or  a  decrease  is  due  and  the  probable  extent 
thereof.  Rising  cost  of  living  furnishes  labor  with  an 
argument,  falling  cost  of  living  puts  the  shoe  on  the  other 
foot.  But  in  any  case  it  is  seized  upon  for  strategic  pur- 
poses by  one  side  or  the  other  and  settles  nothing  as  to 
the  fundamental  justice  of  the  basic  wage. 

This  decision  was  rendered  at  a  period  of  inflated 
prices  and  high  costs  of  living,  and  was  generally  accepted 
and  put  into  force.  But  a  period  of  readjustment  be- 
ginning in  the  fall,  in  which  traffic  fell  off  rapidly,  threw 
the  railroads  into  a  serious  financial  condition.  In- 
creased rates  which  had  been  granted  in  August  were 
of  little  avail  when  there  was  no  traffic  to  which  to 
apply  them,  and  relief  was  sought  in  a  reduction  in  ex- 


316  RAILROADS  AND  GOVERNMENT 

penses.  Conferences  were  held  by  the  individual  roads 
with  various  classes  of  employees  with  reference  to  cuts 
in  wages,  in  all  of  which  failure  to  reach  agreement  re- 
sulted. The  first  dispute  was  filed  by  the  New  York 
Central  in  March  1921.  Appreciating  that  this  was  to 
be  followed  by  many  others,  the  board  consolidated  the 
disputes  into  a  single  hearing  and  rendered  a  general 
decision,  effective  July  i,  I92I.1  It  found  that  the  cost 
of  living  had  decreased  since  its  decision  of  a  year  before, 
and  that  the  scale  of  wages  for  similar  work  outside 
had  declined.  Influenced  primarily  by  this  situation, 
it  reduced  the  wages  approximately  12  per  cent  on  the 
roads  and  for  the  classes  involved.  For  this  decision 
the  chiefs  of  the  four  brotherhoods  and  the  switchmen 
refused  to  accept  responsibility.  After  a  vain  attempt 
to  obtain  the  attitude  of  the  railroads  concerning  further 
decreases,  and  concerning  the  abolition  of  rules  and 
the  elimination  of  punitive  overtime,  they  arranged  for 
a  referendum  vote  on  the  question  of  giving  the  chiefs 
power  to  call  a  strike.  A  similar  referendum  was  taken 
by  the  shop  crafts.  In  every  instance,  the  authority 
asked  for  was  conferred  by  overwhelming  majorities.2 

As  early  as  December  1920,  six  months  after  the  in- 
crease in  wages  had  been  announced,  the  board  felt 
called  upon  to  warn  both  carriers  and  employees  that 
violations  of  law  had  come  to  its  knowledge.  Carriers 
were  coercing  employees,  refusing  conferences  and  refus- 


1  Decision  No.  147,  June  i,  1921. 

2  On  October  15,  1921,  an  order  for  a  nation-wide  strike  was  issued 
by  the  five  big  unions,  to  be  followed  later  by  a  dozen  others,  and  in- 
volving altogether  2,000,000  men.     The  roads  of  the  country  were 
divided  into  four  groups.     The  call  involving  the  first  group  of  97,000 
miles  was  made  effective  on  October  30,  and  the  other  calls  were  to 
follow  in  rapid  succession.     But  action  by  the  Labor  Board  through 
formal  orders  and  by  personal  appeal,  combined  with  an  aroused  and 
hostile  public  opinion,  led  to  a  withdrawal  of  the  strike  order  at  the 
last  moment. 


REGULATION   OF  WAGES  AND  WORKING  CONDITIONS     317 

ing  to  refer  disputes  to  the  board,  and  organizations  of 
employees  were  declining  to  refer  disputes,  and  were  sub- 
mitting strike  ballots  to  their  membership.  Special 
emphasis  was  laid  by  the  board  upon  the  primary  pro- 
cedure that  the  law  required — the  adoption  by  the  par- 
ties of  every  available  means  to  avoid  interruption  of 
operation.  This  meant  conference  on  the  individual  road 
and  in  case  of  disagreement,  reference  of  the  dispute  to 
the  board,  and  then  by  implication,  if  not  by  express 
wording  of  the  statute,  abstention  from  any  interruption 
to  commerce  pending  the  board's  decision. 

Two  cases  will  illustrate  the  board's  position.  In  the 
one,  an  organization  of  employees,  after  failure  to  de- 
cide their  dispute  with  the  carrier  by  conference,  went 
on  strike  and  made  application  at  the  same  time  for  a 
decision  by  the  Labor  Board.  The  board  declined  to 
entertain  the  application  because  the  employees  were  not 
acting  in  obedience  to  the  law.  They  had  not  "exerted 
every  reasonable  effort  and  adopted  every  available 
means  to  avoid  any  interruption  to  the  operation  of  the 
carriers."1 

The  other  case  is  that  of  the  Erie  Railroad,  which,  be- 
cause of  its  financial  condition,  reduced  the  compensation 
of  certain  classes  of  employees  in  January  1921,  after 
an  unsuccessful  conference  with  some  of  the  classes  in- 
volved. This  action  was  condemned  by  the  board  and 
held  to  be  illegal.2  The  following  quotation  from  the 


1  Decision  No.  I,  April  1920. 

2  Decision  No.  91,  U.  S.  Railroad  Labor  Board,  March  2, 1921.    The 
first  case  of  this  kind  was  that  of  the  Atlanta,  Birmingham  and  Atlantic, 
which  announced  decreases  on  February  i,  1921,  of  approximately  50 
per  cent  from  the  rates  fixed  by  the  Labor  Board  the  previous  July. 
This  road  was  in  a  precarious  financial  condition,  and  following  the 
decision  of  the  Labor  Board  on  February  21  that  it  had  violated  the 
law,  it  promptly  went  into  the  hands  of  a  receiver.     The  reduced  wage 
rates  were  confirmed  by  Judge  Sibley  of  the  U.  S.  District  Court,  and 
a  new  legal  question  was  thereby  raised. 


318  RAILROADS   AND   GOVERNMENT 

decision  clearly  expresses   the  fundamental  purpose  of 
the  new  labor  legislation: 

"This  position,  of  course,  renders  nugatory  and  vain 
the  elaborate  and  costly  processes  established  by  the  Act 
and  applied  by  this  Board.  It  sweeps  aside  at  the  will 
of  one  party  a  decision  arrived  at  after  the  presentation 
of  evidence  and  argument  by  the  many  parties  to  the 
dispute,  accepted  by  all  and  now  obeyed  by  substantially 
all  carriers.  It  justifies  a  disregard  of  the  factors  speci- 
fied by  Congress  for  the  ascertainment  of  just  and  reason- 
able wages  and  substitutes  for  these  factors  the  financial 
benefit  of  the  carrier.  If  valid,  the  intent  of  Congress 
that  conference,  reasonableness  and  justice  should  be 
substituted  for  power,  violence  and  disorder  in  the  settle- 
ment of  railroad  labor  disputes  is  utterly  destroyed 
and  legislation  enacted  after  the  most  careful  considera- 
tion rendered  ridiculous  and  even  fraudulent.  If  a 
carrier  may  arbitrarily  reduce  wages  decided  to  be  rea- 
sonable and  set  aside  rules  while  a  party  to  proceedings 
with  regard  to  such  rules,  no  reason  appears  why  rail- 
road employees  may  not  announce  an  immediate  inten- 
tion of  abandoning  the  service  in  concert  unless  demands 
for  increased  wages  or  more  favorable  working  condi- 
tions are  at  once  satisfied,  provided  a  trend  toward 
higher  living  costs  shall  have  appeared  or  wage  scales 
in  similar  industries  shall  have  advanced.  Such  conduct 
is  highly  provocative  of  interruption  to  traffic  and  is 
not  only  not  consistent  with  the  Act,  but  is  thereby 
clearly  condemned  and  prohibited." 

This  position  of  the  board  is  emphatically  reiterated 
in  an  elaborate  opinion  in  September  192 1,1  and  may  be 
summarized  as  follows.  Public  interest  demands  unin- 
terrupted operation  of  transportation  lines.  Congress 

1  Decision  No.  224  (Docket  426). 


REGULATION   OF  WAGES   AND  WORKING  CONDITIONS     319 

recognized  this  by  making  it  the  legal  duty  of  all  car- 
riers and  employees  to  exert  every  reasonable  effort  and 
adopt  every  available  means  to  avoid  interruption  of 
operation.  It  ordered  that  all  disputes  shall  be  consid- 
ered, and  if  possible  decided  in  local  conference.  If  not 
so  decided,  they  shall  be  referred  to  the  proper  board  for 
hearing  and  decision.  The  Labor  Board  is  required  to 
hear  and  decide  all  disputes  not  settled  elsewhere. 

The  particular  case  here  at  issue  was  one  in  which  the 
road  had  discharged  a  man  because  he  belonged  to  a 
union,  and  the  road  had  challenged  the  power  of  the 
Labor  Board  to  interfere  in  a  matter  of  contract  between 
employer  and  employee.  But  the  board  stood  firmly 
upon  the  mandate  of  Congress  that  it  must  decide  all 
disputes  that  were  likely  to  interrupt  the  operation  of 
the  carrier.  This  position  is  profoundly  revolutionary, 
for  it  takes  out  of  the  hands  of  the  individual  carrier  all 
control  of  its  labor  relations  when  they  have  reached  a 
stage  of  disagreement  that  cannot  be  settled  by  con- 
ference. 

Of  course  there  is  no  method  by  which  the  board  can 
enforce  its  decisions  beyond  that  of  invoking  public  con- 
demnation. So  far  as  any  specific  penalty  is  concerned, 
each  carrier  and  each  employee  organization  is  at  liberty 
to  set  at  defiance  the  procedure  laid  down  by  the  statute. 
The  extent  of  the  punishment  is  a  solemn  declaration 
by  the  Labor  Board  that  they  are  violators  of  the  law. 
But  in  the  present  state  of  labor  controversy,  when 
popular  opinion  is  counted  upon  to  such  a  degree,  when 
organized  propaganda  is  being  employed  continuously 
by  both  sides  for  "educational  purposes,"  no  railroad 
corporation  and  no  reputable  labor  organization  will 
lightly  incur  the  odium  consequent  upon  violation  of 
law.  Only  acute  financial  straits  and  the  long  delays  in 
reaching  settlement  have  led  any  of  the  carriers  to  break 
over  the  barriers  of  law,  and  the  cases  are  very  few. 


320  RAILROADS  AND    GOVERNMENT 

Employee  violation  has  been  the  work  of  "outlaw"  organ- 
izations, recently  formed,  without  traditions  or  experi- 
ence and  lacking  in  wise  leadership. 

The  issue  upon  which  the  struggle  between  the  carriers 
and  their  employees  largely  concentrated  was  that  which 
involved  the  retention  or  abandonment  of  the  "national 
agreements."  As  already  described,  five  of  these  agree- 
ments became  effective  between  October  1919,  and  Feb- 
ruary 1920,  three  of  them  after  the  presidential  proclama- 
tion announcing  the  return  of  the  roads  had  been  issued. 
They  concerned  shop  crafts,  maintenance-of-way  em- 
ployees, clerks,  firemen,  and  signalmen.  They  applied 
nationally  and  universally  certain  working  rules  regard- 
less of  local  conditions  or  previous  custom  or  agreement. 
They  concerned  the  length  of  day,  starting  and  stopping 
time,  payment  for  time  not  worked,  methods  of  paying 
for  overtime.  They  prohibited  piece-work  and  substi- 
tuted the  time  basis  of  payment  wherever  piece-work 
had  been  introduced.  They  restricted  apprenticeship. 
They  reclassified  occupations  on  craft  lines,  abolishing 
many  existing  practices  under  which  an  employee  might 
perform  in  the  course  of  the  day  several  different  types 
of  labor.  That  is  to  say,  they  made  the  rules  apply  to 
the  crafts  regardless  of  a  man's  location  in  a  department, 
thus  creating  a  division  of  jurisdiction  and  a  conflict  in 
working  rules  among  employees  engaged  in  the  same 
general  tasks.  And,  of  course,  all  this  increased  seriously 
the  cost  of  doing  the  work.  Employees  insisted  that  all 
the  rules  had  been  previously  in  effect  on  the  individual 
roads.  Some  of  them  had  been  in  force  on  some  roads, 
but  no  considerable  number  on  any  one.  Many  roads 
had  no  agreements  at  all  with  any  organizations  except 
those  in  train  service.  The  only  considerable  territory 
in  which  agreements  such  as  are  here  being  described 
had  been  in  effect  previously  was  the  Southeast,  and 
there  only  since  1917,  when  under  threat  of  a  strike  and 


REGULATION  OP   WAGES  AND  WORKING   CONDITIONS     321 

the  pressure  of  war  traffic,  the  roads  conceded  demands 
of  the  shop  crafts  which  approximated  those  of  the  na- 
tional agreement  two  years  later. 

Why,  it  may  be  asked,  should  this  goal  have  been 
reached  so  suddenly  during  the  period  of  federal  control, 
when  so  little  progress  had  been  made  theretofore?  In 
the  first  place,  the  fact  that  the  roads  were  nationalized 
and  operated  as  a  unit,  and  that  negotiations  concern- 
ing working  conditions  were  being  conducted  almost 
wholly  in  Washington  for  the  entire  country,  would  pro- 
vide a  situation  favorable  to  the  development  of  the 
national  agreement.  Then  it  is  not  without  significance 
that  the  Director  of  Labor  in  the  Railroad  Administra- 
tion was  the  chief  of  the  Brotherhood  of  Railroad  Fire- 
men and  Enginemen.  His  official  reports  show  no  ten- 
dency to  treat  employee  organizations  with  other  than 
extreme  consideration.  Finally,  the  actual  method  of 
negotiation  explains  the  character  of  the  agreements 
themselves.  When  committees  of  the  Railroad  Ad- 
ministration, consisting  in  part  of  former  railroad  execu-  n 
tives,  had  twice  failed  to  agree  with  employee  committees 
on  a  large  number  of  the  rules,  the  Director- General 
appointed  a  new  committee  from  his  official  staff,  con- 
sisting wholly  of  men  whose  former  affiliations  were 
with  union  labor,  and  they  sat  down  in  conference  with 
representatives  of  the  Railway  Department  of  the  Ameri- 
can Federation  of  Labor.  Agreements  that  emerged  from 
this  happy  family  conference  were  approved  by  the  Rail- 
road Administration  and  put  formally  into  effect.1 

The  carriers,  relying  upon  the  specific  wording  of  the 
contract,  took  the  position  that  the  national  agreements 
terminated  with  the  end  of  federal  control,  and  they  de- 
clined in  their  conferences  with  the  employees  in  March 
1920,  to  discuss  them  at  all.  Their  continuance  was  one 
of  the  demands  of  the  employees  when  the  whole  ques- 

1  Senate  Committee  Hearings  (June  14,  1921),  page  649. 


322  RAILROADS   AND    GOVERNMENT 

tion  of  wages  and  working  conditions  got  before  the  Labor 
Board.  Although  they  believed  them  to  be  abrogated, 
the  roads  carried  the  agreements  along  after  March  i 
because  they  were  obviously  involved  with  the  matter 
of  wages,  and  the  Transportation  Act  had  provided 
against  any  reduction  in  wages  before  September  i. 

In  its  decision  of  July  1920,  the  Labor  Board,  because 
of  lack  of  time  for  consideration,  deferred  action  on  these 
agreements  and  continued  them  in  force  until  further 
hearings  could  be  conducted.  It  was  the  following  April 
before  decision  upon  them  was  rendered.1  The  issue  was 
this:  Shall  the  conditions  of  work  be  agreed  upon  in  a 
national  conference  between  representatives  of  carriers  and 
employee  organizations  and  uniformly  and  nationally  ap- 
plied, or  shall  they  be  drawn  up  on  each  road  to  meet  the 
local  situation  ?  The  organizations  insisted  that  local  con- 
ferences meant  a  waste  of  time  with  a  multiplicity  of  con- 
troversies producing  irritation  and  disturbance,  and  that 
these  local  conferences  would  be  exposed  to  all  the  pres- 
sure of  the  Association  of  Railway  Executives,  thus  creat- 
ing a  disparity  of  force  that  would  produce  discontent  and 
probably  would  result  in  "traffic  interruptions" — a  polite 
name  for  strikes.  In  this  argument  they  certainly  under- 
estimated the  power  of  their  own  organizations  to  stand 
up  against  those  of  the  railroads.  They  had  had  great 
success  with  their  bipartisan  boards  during  the  war.  The 
labor  members,  with  no  other  interest  than  wage  sched- 
ules, had  become  expert  negotiators,  and  there  is  no 
question  but  that  the  labor  side  of  the  argument  won 
the  day  in  the  majority  of  instances.  This  success  could 
be  continued  and  perpetuated,  so  it  seemed,  under  a  plan 
of  collective  bargaining  on  a  national  basis  with  union 
recognition. 

The  carriers  maintained  that  the  most  satisfactory 
rules  were  those  negotiated  by  the  employees  and  officers 
1  Decision  No.  119  (April  14,  1921). 


REGULATION  OF  WAGES  AND  WORKING  CONDITIONS     323 

who  live  under  them,  and  that  the  rules  should  reflect 
the  substantial  differences  existing  in  the  demands  of  the 
service  on  different  roads.  They  found  national  con- 
tracts incompatible  with  efficient  and  economical  opera- 
tion, and  insisted  that  negotiation  should  at  least  begin 
with  the  local  unit.  They  demonstrated  that  the  exist- 
ing system  was  enormously  wasteful  and  expensive.  In 
their  publicity,  they  claimed  that  the  restoration  of  local 
negotiation  would  mean  a  saving  of  at  least  $300,000,000 
per  year.  However,  their  official  spokesman  before  the 
Senate  Committee,  and  the  best  authority  on  the  subject, 
stated  that  his  committee,  after  exhaustive  investigation, 
had  come  to  the  conclusion  that  there  was  no  possible 
way  in  which  it  could  arrive  at  even  an  approximate  esti- 
mate of  what  these  rules  had  cost  the  railroads.1  There 
were  some  executives,  but  probably  not  a  dominating 
element,  who  looked  with  disfavor  and  alarm  upon  the 
growth  of  the  labor  organizations  and  to  whom  the  main 
object  in  restoring  local  bargaining  was  to  break  down 
national  unionism.  The  fear  of  "one  big  union"  occa- 
sionally cropped  out  in  the  testimony.  What  national 
bargaining  certainly  did  mean  was  that  railroad  officers 
must  deal  with  national  officers  first,  and  in  this  demand 
it  violated  what  should  be  a  fundamental  principle  of 
labor  negotiation.  To  quote  from  the  report  of  Presi- 
dent Wilson's  Second  Industrial  Commission: 

"Industrial  problems  vary  not  only  with  each  industry 
but  in  each  establishment.  Therefore,  the  strategic  place 
to  begin  battle  with  misunderstanding  is  within  the  in- 
dustrial plant  itself.  Primarily  the  settlement  must  come 
from  the  bottom,  not  from  the  top." 

This  principle  is  peculiarly  applicable  to  the  railroad 
industry,  because  the  geographical  difficulties  are  so  seri- 

1  Testimony  of  E.  R.  Whiter,  asst.  to  vice-president  in  charge  of 
personnel,  Pennsylvania  Railroad,  who  handled  the  case  for  the  rail- 
roads before  the  Railroad  Labor  Board.  Senate  hearings  June,  1921. 


324  RAILROADS  AND   GOVERNMENT 

ous.  Employees  are  scattered  over  a  wide  extent  of  ter- 
ritory and  thrown  largely  on  their  own  resources.  If  the 
spirit  of  personal  loyalty  to  the  individual  operating  or- 
ganization is  not  present,  a  deadening  effect  on  the  entire 
organization  rapidly  develops,  which  it  is  impossible  to 
check. 

The  board  was  unable  to  find  that  all  the  rules  were 
just  and  reasonable  for  all  carriers,  and  it  therefore  re- 
fused to  extend  the  national  agreements  indefinitely.  It 
found  that  certain  rules  were  unduly  burdensome  and 
should  be  modified  to  meet  local  conditions.  Others 
were  of  a  general  nature,  and  uniformity  should  be  pre- 
served. Accordingly,  it  ordered  that  the  national  agree- 
ments should  terminate  on  July  i,  1921.  Meanwhile, 
conferences  should  be  held  locally  and  the  board  should 
be  informed  of  the  outcome,  whether  agreement  or  dis- 
agreement, before  July  i.  Undue  delay  on  the  part  of 
employees  might  lead  the  board  to  terminate  the  agree- 
ment with  regard  to  this  class  of  employees,  and  undue 
delay  on  the  part  of  the  carrier  might  lead  to  its  extension. 
In  cases  of  disagreement,  the  board  would  promulgate 
rules  effective  after  July  i.  As  a  guide  in  the  promulga- 
tion of  working  agreements  on  each  road,  the  board  is- 
sued a  set  of  principles  with  which  it  ordered  that  the 
new  rules  should  be  consistent. 

In  view  of  the  fact  that  this  is  the  first  occasion  upon 
which  a  fundamental  labor  code  has  been  attempted  in 
the  railroad  industry,  it  is  sufficiently  significant  to  warrant 
reproduction  of  the  code  in  full.1 

"i.  An  obligation  rests  upon  management,  upon  each 
organization  of  employees  and  upon  each  employee  to 
render  honest,  efficient  and  economical  service  to  the 
carrier  serving  the  public. 

"2.  The  spirit  of  co-operation  between  management 

1  Decision  No.  119,  Exhibit  B. 


REGULATION   OF   WAGES   AND   WORKING   CONDITIONS      325 

and  employees  being  essential  to  efficient  operation,  both 
parties  will  so  conduct  themselves  as  to  promote  this 
spirit. 

"3.  Management  having  the  responsibility  for  safe, 
efficient  and  economical  operation,  the  rules  will  not  be 
subversive  of  necessary  discipline. 

"4.  The  right  of  railway  employees  to  organize  for 
lawful  objects  shall  not  be  denied,  interfered  with  or  ob- 
structed. 

"5.  The  right  of  such  lawful  organization  to  act  toward 
lawful  objects  through  representatives  of  its  own  choice, 
whether  employees  of  a  particular  carrier  or  otherwise, 
shall  be  agreed  to  by  management. 

"6.  No  discrimination  shall  be  practised  by  manage- 
ment as  between  members  and  non-members  of  organiza- 
tions or  as  between  members  of  different  organizations, 
nor  shall  members  of  organizations  discriminate  against 
non-members  or  use  other  methods  than  lawful  persuasion 
to  secure  their  membership.  Espionage  by  carriers  on 
the  legitimate  activities  of  labor  organizations  or  by  labor 
organizations  on  the  legitimate  activities  of  carriers  should 
not  be  practised. 

"7.  The  right  of  employees  to  be  consulted  prior  to 
a  decision  of  management  adversely  affecting  their  wages 
or  working  conditions  shall  be  agreed  to  by  management. 
This  right  of  participation  shall  be  deemed  adequately 
complied  with  if  and  when  the  representatives  of  a  ma- 
jority of  the  employees  of  each  of  the  several  classes  di- 
rectly affected  shall  have  conferred  with  the  manage- 
ment. 

"8.  No  employee  should  be  disciplined  without  a  fair 
hearing  by  a  designated  officer  of  the  carrier.  Suspension 
in  proper  cases  pending  a  hearing,  which  shall  be  prompt, 
shall  not  be  deemed  a  violation  of  this  principle.  At  a 
reasonable  time  prior  to  the  hearing  he  is  entitled  to  be 
apprised  of  the  precise  charge  against  him,  He  shall 


320  RAILROADS  AND   GOVERNMENT 

have  reasonable  opportunity  to  secure  the  presence  of 
necessary  witnesses  and  shall  have  the  right  to  be  there 
represented  by  a  counsel  of  his  choosing.  If  the  judg- 
ment shall  be  in  his  favor,  he  shall  be  compensated  for 
the  wage  loss,  if  any,  suffered  by  him. 

"9.  Proper  classification  of  employees  and  a  reason- 
able definition  of  the  work  to  be  done  by  each  class  for 
which  just  and  reasonable  wages  are  to  be  paid  is  neces- 
sary, but  shall  not  unduly  impose  uneconomical  condi- 
tions upon  the  carriers. 

"10.  Regularity  of  hours  or  days  during  which  the 
employee  is  to  serve  or  hold  himself  in  readiness  to  serve 
is  desirable. 

"n.  The  principle  of  seniority  long  applied  to  the  rail- 
road service  is  sound  and  should  be  adhered  to.  It  should 
be  so  applied  as  not  to  cause  undue  impairment  of  the 
service. 

"12.  The  Board  approves  the  principle  of  the  eight- 
hour  day,  but  believes  it  should  be  limited  to  work  re- 
quiring practically  continuous  application  during  eight 
hours.  For  eight  hours'  pay  eight  hours'  work  should 
be  performed  by  all  railroad  employees  except  engine 
and  train  service  employees,  regulated  by  the  Adamson 
Act,  who  are  paid  generally  on  a  mileage  basis  as  well 
as  on  an  hourly  basis. 

''13.  The  health  and  safety  of  employees  should  be 
reasonably  protected. 

"14.  The  carriers  and  the  several  crafts  and  classes  of 
railroad  employees  have  a  substantial  interest  in  the 
competency  of  apprentices  or  persons  under  training. 
Opportunity  to  learn  any  craft  or  occupation  shall  not  be 
unduly  restricted. 

"15.  The  majority  of  any  craft  or?  class  of  employees 
shall  have  the  right  to  determine  what  organization  shall 
represent  members  of  such  craft  or  class.  Such  organiza- 
tion shall  have  the  right  to  make  an  a^greement  which  shall 


REGULATION  OF  WAGES  AND  WORKING  CONDITIONS     327 

apply  to  all  employees  in  such  craft  or  class.  No  such 
agreement  shall  infringe,  however,  upon  the  right  of  em- 
ployees not  members  of  the  organization  representing 
the  majority  to  present  grievances  either  in  person  or 
by  representatives  of  their  own  choice. 

"16.  Employees  called  or  required  to  report  for  work, 
and  reporting  but  not  used,  should  be  paid  reasonable 
compensation  therefor." 

While  at  first  glance  it  may  seem  that  the  board,  in 
issuing  this  code,  has  gone  beyond  its  prerogatives  and 
has  presumed  to  dictate  in  matters  of  internal  manage- 
ment, yet,  when  it  is  recalled  that  it  is  a  court  of  final 
appellate  jurisdiction  in  matters  of  working  rules  as  well 
as  wages,  the  code  becomes  merely  an  announcement  of 
the  grounds  upon  which  it  will  decide  disputes  before  it. 

It  is  not  feasible  to  discuss  here  the  principles  enun- 
ciated by  the  board.  It  is  sufficient  to  point  out  that,  if 
they  are  all  conscientiously  incorporated  into  agreements 
on  all  the  roads,  a  substantial  advance  will  have  been 
made  in  the  strategic  position  of  railroad  labor.  The 
right  of  labor  to  organize,  the  right  to  be  represented  by 
those  of  its  own  choice,  whether  employees  of  the  carrier 
or  not,  the  right  to  a  hearing  in  case  of  discipline,  the 
right  to  decide  what  organization  shall  represent  a  par- 
ticular craft  in  negotiations,  are  all  fundamental  demands 
of  labor.  The  last  point,  covered  in  paragraph  15,  is 
particularly  significant.  It  gives  the  majority  of  any 
craft,  whether  organized  or  not,  the  right  to  determine 
what  organization  shall  represent  it  in  negotiations,  and 
the  agreement  thus  perfected  applies  to  all  employees 
of  the  craft.  Thus,  while  it  is  specifically  provided  that 
non-union  members  may  present  grievances  either  per- 
sonally or  by  representatives  of  their  own  choice,  the 
tendency  of  the  principle  is  to  create  and  recognize  craft 
organization,  and  to  provide  that  such  organization  shall 


328  RAILROADS  AND  GOVERNMENT 

deal  for  all  members  of  the  craft,  whether  or  not  they  are 
members  of  the  union.  In  behalf  of  management,  the 
code  demands  eight  hours  of  work  in  return  for  eight  hour« 
of  pay.  Further,  it  recognizes  that  discipline  is  neces- 
sary, and  that  there  is  a  limit  to  the  application  of  the 
seniority  rule  and  the  classification  of  employees. 

Adjustment  boards,  regional  or  national,  have  not  as 
yet  been  put  into  operation.1  Labor,  except  for  train- 
service  employees  who  have  had  for  many  years  their 
territorial  scheme  of  negotiation,  has  spent  its  efforts  in 
attempting  to  continue  the  national  agreements  and 
with  them  national  bargaining.  The  general  disposition 
of  the  carriers  has  been  to  oppose  these  regional  or  na- 
tional adjustment  boards  unless  representatives  of  the 
public  were  made  members;  in  other  words,  unless  me- 
diation were  converted  into  arbitration.  To  this  the 
employees  have  refused  to  agree.  The  consequence  has 
been  that  controversies  over  working  rules,  which  the  law 
obviously  intended  should  be  threshed  out  through  the 
mediation  process,  have  gone  directly  to  the  Labor  Board 
along  with  wages,  and  have  burdened  it  unduly  with 
matters  that  should  have  been  settled  in  conference. 

Following  upon  the  reference  to  the  individual  carriers 
and  their  employees  of  the  problem  of  working  agree- 
ments, an  issue  of  far-reaching  significance  developed  on 
the  Pennsylvania  road  between  the  management  and  the 
members  of  two  groups  of  organizations,  those  compris- 
ing the  shop  crafts  and  the  clerks,  freight-handlers,  ex- 
press and  station  employees.  In  arranging  for  the  selec- 
tion by  ballot  of  representatives  of  the  men  who  were 
to  confer  with  the  management  in  drawing  up  working 
rules,  the  railroad  company  provided  a  ballot  which  com- 

1  It  is  announced  (September  1921)  that  the  Baltimore  and  Ohio 
and  the  New  York  Central  are  contemplating  a  joint  regional  board  for 
the  settlement  of  disputes  concerning  working  rules  with  the  train- 
service  and  switchmen's  organizations.  This  movement  is  likely  to 
spread . 


REGULATION  OF  WAGES  AND   WORKING   CONDITIONS     329 

pelled  each  employee  to  vote  for  individuals  and  to  con- 
fine his  vote  to  employees  of  the  Pennsylvania  Railroad 
in  the  class  to  which  he  belonged.  Moreover,  the  com- 
pany organized  the  railroad  into  divisions,  and  limited 
the  employees'  choice  to  a  representative  upon  their  own 
division.  The  organizations  referred  to  held  this  action 
of  the  carrier  to  be  in  conflict  with  the  law  and  refused 
to  participate,  and  the  issue  reached  the  Labor  Board. 
This  board  held  that  the  carrier  was  in  the  wrong  in  un- 
dertaking to  assume  control  of  the  selection  of  those  who 
were  to  represent  the  employees,  and  also  in  dividing  its 
system  into  regions  and  requiring  regional  representa- 
tives, which  might  easily  lead  to  gerrymandering.  More- 
over, the  carrier  was  held  to  be  culpable  in  refusing  to 
permit  employees  to  place  the  name  of  an  organization 
on  the  ticket,  instead  of  the  name  of  an  individual.  The 
Act  recognized  the  existence  of  organizations  of  railroad 
employees.  Men  had  built  up  these  organizations  at 
their  own  expense,  had  put  their  most  competent  men 
at  the  head  of  them,  had  accumulated  valuable  data  and 
information  to  be  used  in  wage  controversies.  If  the 
majority  desired  to  take  advantage  of  this  organization, 
they  could  not  be  denied.  And  in  any  case,  the  placing 
of  the  name  of  the  organization  on  the  ballot  was  equiva- 
lent to  placing  there  the  names  of  individuals,  because 
it  was  recognized  that  the  officers  of  these  organizations 
would  represent  them  in  any  conference.  Moreover,  the 
employee  could  not  be  restricted  to  voting  for  an  em- 
ployee of  the  Pennsylvania  road.  He  might  choose  any 
one  to  represent  him,  which  in  the  case  of  the  unions 
might  mean  one  of  the  chief  officials,  who  had  no  per- 
sonal contact  with  the  individual  property.  On  the  other 
hand,  the  employees  could  not  require  that  the  ballot  con- 
tain only  the  name  of  the  organization,  because  the  statute 
intended  to  give  opportunity  for  non-union  men  freely 
to  express  their  choice. 


330  RAILROADS  AND   GOVERNMENT 

The  issue  then  was  not  a  clear-cut  one  between  the 
closed  and  open  shop,  for  the  Labor  Board  had  expressly 
rejected  the  claim  of  the  organization  to  control  the  elec- 
tion. On  the  other  hand,  the  claim  of  the  Pennsylvania 
of  the  right  to  organize  the  system  in  such  fashion  as  to 
insure,  so  far  as  possible,  individual  employee  voting 
with  no  specific  recognition  of  the  union  was  likewise  re- 
jected. It  was  to  be  an  open  unrestricted  choice  over  the 
entire  system  of  either  individual  employees  or  union 
representatives  as  the  body  of  workmen  decided. 

The  railroad  made  application  to  the  Labor  Board  to 
vacate  its  decision  on  the  ground  that  the  board  had  ex- 
ceeded its  jurisdiction  in  prescribing  principles  to  gov- 
ern the  making  of  agreements  and  in  laying  down  the 
methods  of  election  of  the  constituent  members  of  a  joint 
conference.  The  road  claimed  to  be  sustained  in  its  posi- 
tion by  66  per  cent  of  the  employees  affected  by  the  rules 
governing  working  conditions.  Its  fundamental  opposi- 
tion to  the  decision  of  the  board  was  that  the  road  might 
be  compelled  to  deal  with  national  union  officers  instead 
of  its  own  men,  that  the  method  discriminated  in  favor  of 
the  union  and  tended  to  compel  the  non-union  men  either 
to  join  the  union  or  see  their  interests  neglected,  and  that 
it  violated  the  fundamental  right  of  employer  and  em- 
ployees to  deal  directly  with  each  other  in  settling  their 
own  affairs.  One  is  impressed  as  in  all  arguments  of  this 
character  with  the  extreme  solicitude  of  the  management 
for  the  welfare  of  the  non-union  man.  He  is  the  lay  figure 
over  which  the  fight  for  the  "open  shop"  is  being  fought. 
There  are  many  reasons  for  believing  that  the  issue  on 
the  Pennsylvania  road  is  not  local  to  that  system,  that 
the  carriers  as  a  whole  are  making  this  a  test  case,  and 
that  the  future  relation  of  labor  to  management  in  this 
industry  is  now  at  stake  in  much  larger  degree  than  the 
public  realizes.  In  fact,  the  answer  of  the  board,  grant- 
ing only  in  minor  degree  the  request  of  the  Pennsylvania 


REGULATION  OF  WAGES  AND   WORKING  CONDITIONS     331 

system,  and  sharply  criticising  the  road  for  proceeding 
in  disobedience  to  its  orders,1  has  apparently  been  re- 
ceived in  a  defiant  manner  by  the  carrier,  which  main- 
tains that  the  board  is  acting  beyond  its  jurisdiction. 
This  resistance  of  carriers  to  the  interference  of  the  board 
with  contract  relations  between  them  and  their  employees, 
when  considered  in  connection  with  the  nation-wide  strike 
called  by  the  labor-unions  consequent  upon  the  board's 
decision  reducing  wages  and  relieving  the  carriers  of  some 
of  the  burdensome  provisions  of  the  national  agreements, 
does  not  promise  well  for  the  future  of  the  Labor  Board. 
It  apparently  has  not  yet  gained  the  confidence  of  either 
side. 

Generally  speaking,  the  attempt  by  the  Labor  Board 
to  obtain  agreements  negotiated  locally  as  a  substi- 
tute for  the  national  agreements  previously  in  force 
failed  throughout  the  country.  This  was  due  to  the  fact 
that  local  representatives  of  the  unions  stood  firm, 
under  instructions  from  their  national  officers,  for  the 
continuance  unmodified  of  the  national  agreements  which 
the  Labor  Board  had  temporarily  suspended.  The  board 
has  now  been  compelled  to  resume  jurisdiction,  and  to 
undertake  the  task  of  revising  the  agreements  clause  by 
clause,  in  order  to  fit  them  fairly  to  existing  conditions. 
For  the  board  has  stated  that  the  complaint  of  the  car- 
riers is  sustained,  and  that  the  rules  formerly  in  effect  are 
in  many  respects  burdensome,  unreasonable,  and  unjust. 
The  important  conclusions  thus  far  reached  by  the  board 
include  the  recognition  of  the  principle  of  the  eight-hour 
day,  and  punitive  pay  for  overtime  work  in  the  shops, 
also  the  policy  of  paying  time  and  one-half  on  Sundays 
and  holidays  except  for  work  which  is  absolutely  essen- 
tial for  continuous  operation.  Another  issue  soon  to  be 
decided  is  that  of  piece-work.  The  men  insisted  in  the 
national  agreements  upon  the  retention  of  the  hourly  basis 

1  Order  in  re  Docket  404  (Sept.  1921);  Decision  No.  218  (July  1921). 


33 2  RAILROADS  AND   GOVERNMENT 

of  pay  on  the  ground  that  piece-work  constitutes  a  form 
of  slavery,  that  it  makes  a  living  wage  impossible, 
and  that  it  prevents  the  exaction  of  time  and  one-half 
for  overtime.  Managements,  on  the  other  hand,  insist 
that  the  better  men  prefer  it,  that  a  fair  wage  is  guaran- 
teed under  it,  that  it  develops  efficiency  and  economy  to 
a  high  degree,  to  the  advantage  of  both  men  and  manage- 
ment.1 

One  question  which  the  Act  does  not  settle  is  that  of 
the  relation  of  wages  to  rates,  specifically  the  relation  of 
the  Labor  Board  to  the  Interstate  Commerce  Commis- 
sion. It  has  frequently  been  asserted,  and  with  some 
measure  of  justification,  that  the  body  that  makes  the 
rates  should  have  control  of  the  expenses,  and  particularly 
,  of  that  largest  single  item,  the  wage  bill.  The  Commis- 
.  X3»  sion  is  instructed  to  see  that  the  railroads  are  honestly 
and  efficiently  managed,  but  its  only  direct  connection 
with  the  wage  situation  is  in  the  requirement  that  the 
Labor  Board  shall  keep  it  informed  by  transmitting  its 
decisions.  To  what  extent  does  the  Labor  Board  recog- 
nize the  rate  situation  or  the  financial  condition  of  the 
carriers  in  making  its  wage  decisions?  When  the  aboli- 
tion of  national  agreements  was  demanded  by  the  car- 
riers they  made  much  of  their  serious  financial  condition. 
The  board  recognized  that  while  its  authority  was  limited 
to  fixing  wages  and  working  rules,  it  could  not  overlook 
the  fact  that  rules  affected  operating  expenditures,  and 
that  unreasonable  rules  imposed  an  undue  burden  on 
carrier  and  public.  Nevertheless,  it  said  that  the  general 
financial  condition  of  the  roads  was  a  matter  for  the  Com- 
mission and  not  for  the  board.  This  can  only  mean  that 
the  board,  while  necessarily  taking  cognizance  of  the 

1  On  October  14,  1921,  the  Labor  Board  authorized  the  railroads  to 
open  negotiations  with  the  unions  for  the  restoration  of  piece-work, 
thus  setting  aside  Rule  i  of  the  national  agreement  with  the  shop  crafts. 


REGULATION  OF  WAGES  AND   WORKING  CONDITIONS     333 

general  financial  situation,  will  decline  to  accept  testi- 
mony specifically  demonstrating  the  financial  condition 
of  the  carriers.  Yet,  in  both  the  law  itself  and  in  its  inter- 
pretation by  the  board,  there  is  a  recognition  of  the  in- 
separability of  rates  and  wages.  Reference  has  already 
been  made  to  the  circumstances  or  conditions  which  the 
law  says  must  be  taken  into  account  by  the  board  in  ad- 
justing wages,  such,  for  example,  as  skill,  hazard,  and  re- 
sponsibility. The  statute  requires  the  board  to  take 
these  factors  into  account  "among  other  relevant  cir- 
cumstances." In  its  second  wage  decision  the  board  de-  ^v 
clared  that  "other  relevant  circumstances"  included 
"the  relation  of  railroad  wages  to  the  aggregate  of  trans- 
portation costs  and  requirements  for  betterments,  to- 
gether with  the  burden  on  the  entire  people  of  railroad 
transportation  charges."  Again,  the  statute  provides 
that  the  Labor  Board  may  suspend  any  decision  on  an 
individual  road  if  it  is  "of  the  opinion  that  the  decision 
involves  such  an  increase  in  wages  or  salaries  as  will  be 
likely  to  necessitate  a  substantial  readjustment  of  the 
rates  of  any  carrier,"  and  shall  hear  and  decide  the  case 
promptly. 

It  is  evident,  therefore,  that  the  Labor  Board  cannot 
and  does  not  decide  wage  questions  without  regard  to 
their  effect  upon  railroad  revenue.  But  neither  can  the 
Commission  fix  rates  regardless  of  the  wage  decisions  of 
the  Labor  Board,  for  it  is  its  duty  to  prescribe  rates  that 
under  honest  and  efficient  management  will  produce  in 
net  operating  income  certain  results  definitely  specified 
by  statute.  These  results  cannot  be  attained  if  expenses, 
of  which  wages  are  the  largest  factor,  are  not  fully  taken 
into  account.  The  close  practical  relationship  of  rates 
and  wages  necessarily  prevails.  The  present  situation 
is  a  travesty  on  justice,  in  which  two  federal  agencies 
control  essential  factors  in  railroad  income  and  expense, 
and  in  which  neither  is  under  statutory  compulsion  to 


334  RAILROADS  AND  GOVERNMENT 

take  account  of  the  rulings  of  the  other.  The  Wage  Board 
may  prove  to  be  a  failure.  In  that  case,  wages  as  well 
as  rates  should  be  placed  under  the  jurisdiction  of  the 
Commission.  This  might  have  been  a  wiser  procedure 
in  the  beginning.  But  now  that  we  have  the  Wage  Board, 
it  is  entitled  to  a  thorough  test.  Such  a  body  provides  a 
valuable  laboratory  for  working  out  solutions  of  this  com- 
plicated wage  problem.  Its  prestige  has  been  increased 
by  its  attitude  toward  the  threatened  strike.  The  Inter- 
state Commerce  Commission  has  abundant  troubles  of 
its  own  without  taking  on  new  ones  of  such  proportions. 
But  an  assumption  of  authority  by  the  Commission 
over  both  rates  and  wages  would  not  get  rid  of  the  diffi- 
culty of  determining  which  should  have  prior  considera- 
tion. It  would  merely  get  rid  of  the  public  scandal  of 
having  two  official  bodies  at  loggerheads.  From  the 
standpoint  of  economic  theory  there  is  no  question  but 
that  wages  must  come  first.  There  may  be  temporary 
emergencies,  such  as  the  present  one  created  by  a  world- 
wide upheaval  of  industrial  conditions,  in  which  some 
compromise  with  fundamental  principles  is  necessary, — 
when  a  deficit  must  be  divided  as  equitably  as  possible 
between  carrier,  employer,  and  the  public.  But  under 
normal  conditions  communities  cannot  expect  to  obtain 
railroad  service  unless  they  pay  for  it.  Among  the  costs 
of  furnishing  this  service,  labor  is  the  largest  element. 
Labor  must  be  paid  the  going  rate  for  similar  service  out- 
side if  the  railroads  are  to  compete  effectively  with  other 
capital  in  the  labor  market.  The  Interstate  Commerce 
Commission  must  accept  the  determination  of  the  Labor 
Board  as  one  of  the  controlling  elements  in  the  fixing  of 
rates.  And,  if  the  situation  requires  it,  this  must  be  made 
clear  by  a  legislative  mandate. 


CHAPTER  XXIII 

REGULATION    OF    WATER   TRAFFIC 

UPON  the  termination  of  federal  control  all  water-trans- 
portation facilities  on  inland  canal  and  coastwise  water- 
ways, including  boats,  barges,  and  tugs  that  did  not  be- 
long to  railroad  companies  were  to  be  transferred  to  the 
Secretary  of  War,  who  was  to  continue  to  operate  them 
under  the  existing  contracts  and  agreements.  Further, 
he  was  authorized  to  construct  terminal  facilities  on  be- 
half of  the  Government  that  would  promote  traffic  inter- 
change, or  to  loan  funds  for  construction  to  any  state 
whose  constitution  prohibited  ownership  of  terminal  facil- 
ities by  other  than  the  state  or  a  public  body.  Opera- 
tion was  to  be  subject  to  the  Interstate  Commerce  Act 
and  to  the  Shipping  Act,  exactly  as  though  the  facilities 
were  privately  owned. 

Agitation  soon  arose  for  the  removal  of  all  Government 
craft  from  the  New  York  Barge  Canal.  Representations 
were  made  officially  to  Congress  by  the  New  York  Canal 
Board  that  the  operation  by  federal  barges  resulted  in 
unfair  competition  and  in  discrimination  against  privately 
owned  barges,  and  that  the  presence  of  the  federal  gov- 
ernment in  the  canal-transportation  business  was  a  detri- 
ment to  the  investment  of  private  capital  for  the  forma- 
tion of  freight-carrying  companies,  upon  which  depended 
the  ultimate  success  of  the  canal.  Government  operation 
had  begun  there  in  September,  1918,  but  without  adequate 
equipment.  The  peculiar  characteristics  of  the  situation 
were  carefully  investigated  and  a  fleet  of  cargo  and  self- 
propelled  barges  was  designed  and  constructed.  How- 
ever, not  until  late  in  1919  were  the  cargo  barges  ready, 
and  none  of  the  others  appeared  until  1920,  after  fed- 

335 


336  RAILROADS  AND  GOVERNMENT 

eral  control  had  ceased.  By  the  end  of  the  season  of 
1920,  the  Government  was  operating  twenty  self-propelled 
barges  and  seventy-two  new  cargo  barges.  The  financial 
statement  for  1920  did  not  reflect  these  improvements. 
The  gross  revenue  for  the  nine  months,  January  to  Sep- 
tember, was  less  than  half  a  million  dollars  and  the  deficit 
$8 7, coo.  The  average  monthly  operating  ratio  was  119 
per  cent.  Yet  the  Secretary  of  War  urged  a  continu- 
ance of  the  service  for  another  year,  which  he  felt  con- 
fident would  be  long  enough  time  to  demonstrate  the 
practicability  and  profitableness  of  a  modern  barge-trans- 
portation service. 

But  Congress  refused  to  listen  and  provided  for  the 
withdrawal  of  the  Government  in  March,  1921,  from 
operation  on  the  New  York  Barge  Canal,  and  also  for 
the  prompt  disposal  of  all  facilities  by  sale,  or  temporarily 
by  lease.1  The  money  obtained  from  the  sale  of  equip- 
ment was  to  be  used  in  the  development  of  inland  trans- 
portation elsewhere,  in  accord  with  the  policy  declared 
by  Congress  in  the  Transportation  Act  of  1920. 

This  declaration2  put  Congress  on  record  in  favor  of 
promoting  water  transportation  and  preserving  it  in  full 
vigor.  The  Secretary  of  War  was  instructed  to  investigate 
types  of  boats,  terminals,3  and  transfers,  to  advise  con- 
cerning locations  and  plans,  and  in  general  to  investigate 
the  present  capacity  and  efficiency  of  the  various  inland 
waterways.  A  thorough  and  honest  investigation  of  our 
existing  waterways  with  a  view  to  a  decision  whether 
they  are  actually  fulfilling  any  economic  function  and 

1  Joint  resolution,  February  27,  1921.  2Sec.  500. 

3  The  investigation  of  terminal  and  transfer  facilities  on  a  more 
elaborate  scale  was  ordered  by  Congress  in  the  Merchant  Marine  Act 
of  June  1920  (Sec.  8),  and  made  the  duty  of  the  U.  S.  Shipping  Board 
and  the  Secretary  of  War.  It  was  provided  that  if  after  the  investiga- 
tion the  board  was  of  the  opinion  that  the  rates  and  regulations  of 
the  railroads  were  detrimental  to  the  development  of  adequate  transfer 
facilities  between  water  and  rail,  it  should  submit  its  findings  to  the 
Interstate  Commerce  Commission  for  action  under  the  law. 


REGULATION   OF   WATER  TRAFFIC  337 

whether  they  ever  can  do  so  would  be  worth  far  more 
than  it  would  cost.  But  the  mandate  issued  by  Con- 
gress .does  not  lead  one  to  hope  for  anything  beyond  the 
usual  superficial  and  unscientific  survey  of  our  water 
facilities.  The  investigation  must  determine  "whether 
such  waterways  are  being  utilized  to  the  extent  of  their 
capacity/'  and  "to  what  extent  they  are  meeting  the 
demands  of  traffic,"  and  "to  investigate  any  other  matter 
that  may  tend  to  promote  and  encourage  inland  water 
transportation."  When  we  recall  what  a  boon  the  river 
and  harbor  bills  have  been  to  our  congressmen,  and  when 
we  follow  the  work  and  the  reports  of  the  United  States 
engineers  in  their  struggles  to  convert  swamps  and  brooks 
and  sand-bars  into  navigable  streams  that  are  to  bring 
untold  prosperity  to  the  settlements  alongside,  we  can 
gather  little  hope  for  a  scientific  study  of  water  trans- 
portation from  this  latest  noble  pronouncement  of  the 
Congress  of  the  United  States. 

The  jurisdiction  of  the  Interstate  Commerce  Commis- 
sion over  foreign  commerce  has  been  extended  by  requiring 
every  water  carrier  of  United  States  registry  so  engaged 
to  file  with  the  Commission  a  schedule  showing  ports  of 
loading,  sailing  dates,  and  routes.  Upon  a  shipper's  ap- 
plication a  railroad  must  request  and  the  carrier  must 
supply  full  statement  as  to  rates  for  a  specific  sailing. 
Upon  notice  from  the  railroad  that  the  rate  has  been 
accepted,  the  steamship  must  reserve  the  necessary  space. 
Based  upon  the  information  obtained,  the  railroad  is 
required  to  issue  a  through  bill  of  lading  to  the  port  of 
destination,  although  its  liability  ceases  upon  delivery 
of  the  freight  to  the  water  carrier.  It  is  specifically  pro- 
vided that  such  bill  of  lading  does  not  constitute  "an 
arrangement  for  continuous  carriage  or  shipment,"  and 
therefore  the  Commission  has  no  control  over  the  water 
portion  of  the  rate. 

It  is  of  interest  to  observe  that  the  Act  requires  the 


RAILROADS  AND   GOVERNMENT 

Commission  to  publish  for  the  information  of  shippers 
throughout  the  country  the  substance  of  the  schedules 
furnished  by  the  water  carriers  relating  to  sailings  and 
rates,  "the  intent  being  that  each  shipping  community 
sufficiently  important,  from  the  standpoint  of  the  export 
trade  .  .  .,  shall  have  opportunity  to  know  the  sailings 
and  routes,  and  to  ascertain  the  transportation  charges 
of  such  vessels  engaged  in  foreign  commerce."  1 

The  Shipping  Act  of  iQi62  and  the  Merchant  Marine 
Act  of  I92O3  confer  upon  the  Shipping  Board  certain 
powers  with  respect  to  rates  charged  by  water  carriers 
that  are  similar  in  character  to  the  powers  exercised  by 
the  Interstate  Commerce  Commission  over  rail  car- 
riers. So  far  as  these  powers  relate  to  water  commerce 
between  United  States  ports,  and  in  some  particulars 
in  matters  of  foreign  commerce,  they  actually  conflict 
with  the  powers  granted  to  the  Commission.  It  is  not 
worth  while  to  go  into  the  conflicts  of  jurisdiction  which 
have  been  heedlessly  created  by  this  recent  shipping 
legislation.  A  reading  of  the  two  statutes  referred  to 
will  suggest  the  problem  with  which  the  two  adminis- 
trative agencies,  the  Shipping  Board  and  the  Inter- 
state Commerce  Commission,  are  now  wrestling.  Juris- 
dictional  conflicts  appear  in  connection  with  granting 
priority  or  embargoes  on  traffic  moving  in  foreign  com- 
merce, in  connection  with  rates  on  commodities  for 
export,  and  with  respect  to  through  bills  of  lading,  port 
regulations,  delivery  of  freight  for  shipment,  and  other 
technical  matters  of  operating  procedure.  Conferences 
between  the  two  authorities  have  thus  far  been  without 
result,  and  Congress  may  have  to  be  called  upon  to 
straighten  out  the  tangle  of  its  own  making. 

Of  still  more  serious  portent,  from  the  standpoint  of 
the  public  welfare,  is  that  we  now  have  two  agencies  in 

1  Sec.  25  (3).  2  39  Stat.  L.,  728,  Sees.  17  and  18. 

1  Pub.  Acts  Nd.  261,  66th  Cong.,  2d  Sess. 


REGULATION  OF  WATER  TRAFFIC  339 

existence,  in  the  nature  of  rivals,  each  interested  in  de- 
veloping its  own  type  of  transportation.  This  eagerness 
for  traffic  is  more  marked  in  the  case  of  the  Shipping 
Board,  for  the  obvious  reason  that  the  United  States  is 
in  the  shipping  business  and  is  apparently  desirous  of 
making  a  record.  By  the  Panama  Canal  Act,  the  rail- 
road companies  were  obliged  to  divest  themselves  of  all 
ownership  in  water  lines  through  the  canal.  In  trans- 
continental territory  their  ability  to  compete  with  the 
water  lines  depends  directly  upon  the  extent  to  which 
the  Commission  will  allow  them  to  depart  from  the 
distance  principle  and  charge  only  the  competitive  rate 
to  and  from  coast  points.  But  in  addition  to  this  they 
must  have  assurance  of  continuity  in  this  business  suffi- 
cient to  warrant  making  investment  in  the  necessary 
facilities.  But  when  the  Commission  takes  up  this 
problem,  it  is  faced  with  a  Shipping  Board  determined  to 
make  business  for  its  ships  and  free  to  draw  upon  the 
United  States  Treasury  to  cover  its  deficits.  As  already 
insisted,  the  public  should  enjoy  the  full  benefit  of  its 
investment  in  the  Panama  Canal.  But  is  it  not  a  short- 
sighted policy  to  use  this  waterway  and  Government 
shipping  to  break  down  a  rail-transportation  system  upon 
which  a  vast  territory  is  wholly  dependent? 

We  started  on  the  wrong  tack  in  the  Panama  Canal 
Act.     The  edict  separating  rail  and  water  line  owner- 

If   &Pif*~ 

ship  with  the  purpose  of  making  them  compete,  was  but 
one  more  evidence  of  the  persistent  vitality  of  the  com- 
petitive theory,  the  working  results  of  which  in  trans- 
portation affairs  are  so  completely  at  variance  with  hopes 
and  expectations.  What  is  needed  is  a  scientific  alloca- 
tion of  traffic  between  the  two  agencies,  both  of  which 
should  be  under  Commission  control  as  to  rates  and  prac- 
tices. In  other  words,  co-operation  as  discussed  in  the 
final  chapter  should  be  made  a  working  principle  in  the 
jianagement  of  our  transportation  agencies. 


CHAPTER  XXIV 

THE  FUTURE 

IT  is  apparent  to  any  one  who  has  followed  the  history 
of  the  relations  of  Government  to  railroads  as  told  in 
the  preceding  pages,  that  the  so-called  "  railroad  prob- 
lem" has  not  yet  been  solved.  We  have  advanced  from 
step  to  step,  steadily  increasing  the  authority  of  the 
Government  and  enlarging  the  area  of  its  exercise.  But 
we  have  not  reached  the  goal.  The  public  is  not  at  the 
present  moment  enjoying  efficient  transportation  ser- 
vice at  satisfactory  rates,  nor  is  there  any  assurance 
that  the  basis  has  been  laid  for  the  preservation  even  of 
such  service  as  we  had  before  the  war.  We  are  not  con- 
vinced that  capital  is  ready  in  a  practical  way  to  back 
this  industry  and  provide  it  with  the  funds  needed  for 
its  growth.  What,  then,  must  we  look  for  in  the  future  ? 
We  are  obviously  in  a  state  of  unstable  equilibrium. 
Can  we  adjust  our  present  structure  by  modifications 
here  and  there  and  thus  stabilize  it  for  a  considerable 
time  ahead,  or  must  we  resort  to  revolutionary  methods 
and  cast  aside  our  present  system  for  something  funda- 
mentally different?  Upon  this  question  opinion  divides. 
It  is  not  the  purpose  here  to  present  these  divergent 
points  of  view  except  incidentally,  but  rather  to  suggest 
a  line  of  development  which  seems  to  promise  for  the 
years  immediately  ahead  the  most  satisfactory  outcome. 
"Solutions"  of  such  a  continuing  problem  as  that  of  the 
railroads,  which  claim  to  dispose  of  all  difficulties  for  all 
time  and  to  usher  in  the  millennium,  need  not  detain  us. 

The  line  of  development  here  suggested  is  based  upon 
the  acceptance  of  the  following  propositions: 

i.  The  railroads  of  the  country  cannot  be  operated 
privately  without  earnings  sufficiently  generous  to  in- 

34° 


THE  FUTURE  341 

sure  a  constant  stream  of  new  capital  into  the  industry. 
This  rate  of  return  cannot  be  stated  with  accuracy,  but 
it  is  probable  that  at  present  it  must  be  as  high  as  6  per 
cent  on  the  investment. 

2.  If  6  per  cent  cannot  be  earned,  it  follows  that  inas- 
much as  the  railroads  must  be  operated,  Government 
aid   will  have  to  be  sought.     Government  aid  means 
taxation,  and  this  means  inevitably  Government  owner- 
ship, and  probably  Government  operation.     Government 
ownership  would  be  a  hazardous  experiment;  Government 
operation  would  be  disastrous. 

3.  No  assurance  is  possible  that  under  existing  condi- 
tions 6  per  cent  can  be  earned  continuously  at  present 
rates.     Higher  rates  are  inadvisable  and  probably  would 
be  less  productive;  many  rates  are  now  too  high.     It 
follows,  therefore,  that  the  necessary  earnings  must  be 
assured    through    savings    in    operating    expense.    This 
means  in  brief  the  development  on  a  national  scale  of  a 
programme  of  efficient  and  economical  operation. 

4.  The  results  sought  cannot  be  attained  by  any  of 
the   minor   economies   frequently   suggested   and   prac- 
tised.    They  must  come  through  a  nation-wide  introduc- 
tion of  methods  of  co-operation. 

These  propositions  require  some  further  elucidation. 
The  first  one  will  command  general  acceptance  in  prin- 
ciple. No  rate-making  body  has  ever  promulgated  a 
schedule  of  rates  without  having  in  mind  its  effect  upon 
the  investment  market.  Even  if  it  were  practicable  so 
to  fix  rates  that  the  public  would  not  only  pay  for  trans- 
portation service  but  also  provide  a  surplus  to  be  devoted 
to  the  improvement  of  the  plant,  there  would  be  no 
justice  in  such  a  procedure.  The  railroads  must  seek 
new  capital  in  the  capital  market.  But  they  must  be 
able  to  show  an  attractive  income  account  in  order  to 
get  it.  Surveying  the  investment  market  as  it  exists 
to-day  and  considering  the  opportunities  for  investment 


342  RAILROADS   AND   GOVERNMENT 

likely  to  arise  in  other  fields  of  industry  during  the  next 
decade,  it  is  improbable  that  a  rate  of  less  than  6  per 
cent  will  prove  attractive. 

It  is  a  common  expression  that  private  operation  is 
now  on  trial,  and  that  if  it  fails,  Government  ownership 
is  inevitable.  That  this  is  an  exact  statement  of  the 
situation  is  somewhat  doubtful.  The  hostility  to  Gov- 
ernment ownership  at  the  close  of  federal  operation  was 
too  genuine  and  too  deep-seated  to  warrant  the  con- 
clusion that  the  country  would  soon  resort  to  this  alterna- 
tive. However,  the  one  factor  that  might  produce  such 
an  outcome  suddenly  would  be  that  of  the  failure  of 
credit.  New  capital  is  absolutely  essential  to  the  very 
existence  of  the  industry.  If  the  Government  alone  can 
furnish  it,  ownership  will  follow.  It  should  be  recalled 
that  the  Government's  financial  interest  in  the  industry 
at  the  present  time  is  probably  nearly  a  billion  of  dollars. 
In  considering  whether  Government  ownership  is  de- 
sirable, it  should  be  borne  in  mind  that  there  is  no  ques- 
tion of  principle  involved.  There  is  nothing  inherently 
wicked  about  Government  ownership  or  operation.  To 
call  it  "socialistic"  does  not  condemn  it,  for  we  are  en- 
joying to  our  universal  satisfaction  many  "socialistic" 
activities  of  a  similar  sort,  such  as  public  postal  facili- 
ties, water-supply,  and  public  highways.  The  only  ques- 
tion involved  is  one  of  expediency,  which  method  will 
give  the  public  the  better  service  at  the  lower  rates. 

Government  ownership  disassociated  from  operation 
has  many  attractive  features.  It  means  above  everything 
else  unification  of  property  in  one  agency,  with  all  the 
possibilities  that  such  an  ownership  gives  in  working  out 
a  unified  system  of  administration.  It  means  assured 
credit,  and  probably  in  the  long  run  some,  and  possibly 
a  considerable,  saving  in  interest.  But  in  view  of  the 
undesirability  of  federal  operation,  Government  owner- 
ship would  be  justifiable  only  if  the  Government  were 


THE  FUTURE  343 

able  to  effect  satisfactory  leases  of  the  property  for  oper- 
ating purposes.  No  one  can  say  whether  this  would  be 
possible,  but  it  is  clear  that  the  operation  of  a  Govern- 
ment property  on  a  rental  basis  would  remove  much  of 
the  incentive  to  vigorous  and  efficient  management  that 
prevails  under  a  regime  where  the  owners  are  the  man- 
agers. 

As  for  Government  operation,  that  suggestion  should 
be  resolutely  laid  one  side  until  we  have  developed  a 
public  civic  consciousness  that  will  stand  the  strain. 
To-day  we  are  ill  fitted  to  undertake  such  a  responsi- 
bility. In  fact,  there  is  no  precedent  anywhere.  For  no 
country  that  has  tried  it  has  the  size  of  ours,  or  its  di- 
versity of  industrial  interests,  in  combination  with  the 
democratic  form  of  Government.  Canada  has  had  it 
forced  upon  her  as  the  result  of  reckless  finance,  but 
Canada  would  be  rid  of  her  burden  if  she  could,  and  a 
study  of  the  results  of  Government  operation  in  that 
country  would  not  encourage  us  to  try  it. 

There  are  two  serious  objections  to  it,  an  economic 
and  a  political  one.  From  the  economic  standpoint, 
we  should  unquestionably  lose  all  the  benefits  that 
spring  from  private  initiative,  and  we  should  realize 
all  the  deadening  influences  of  bureaucracy.  It  is  un- 
reasonable to  expect  men  of  the  caliber  of  our  railroad 
executives  to  remain  indefinitely  as  Government  em- 
ployees and,  it  may  be  added,  at  the  salaries  that  the 
public  is  willing  to  pay.  They  gave  their  services  with- 
out reserve  to  the  Government  during  the  war,  but  when 
peace  was  signed  they  stole  away  one  by  one  as  rapidly 
as  possible.  The  opportunities  for  waste  in  the  railroad 
business  are  enormous.  Oversight  of  operations  is  diffi- 
cult because  of  the  geographical  extent  of  the  industry. 
Anything  that  might  be  saved  in  interest  charges  through 
Government  ownership  would  be  far  more  than  offset 
by  the  enhancement  of  operating  costs,  and  the  country 


344  RAILROADS  AND   GOVERNMENT 

would  lose  that  valuable  asset,  discussed  elsewhere  under 
competition  in  service,  which  has  been  called  railroad 
statesmanship. 

The  political  effects  of  Government  ownership  are  too 
well  realized  to  require  any  extended  comment.  We 
have  had  suggestions  in  recent  years  as  to  what  this 
might  mean.  The  passage  of  the  Adamson  Eight  Hour 
Law  in  1916  showed  us  what  labor  could  do  politically 
when  it  got  the  country  by  the  throat.  The  filibuster 
which  closed  the  session  of  Congress  in  March,  1919,  and 
defeated  all  the  appropriation  bills,  causing  acute  finan- 
cial distress  in  the  Railroad  Administration,  was  a  minor 
illustration  of  the  way  in  which  political  motives  may 
affect  the  interests  of  industries  dependent  upon  the  Gov- 
ernment. The  multitude  of  ways  in  which  a  pestiferous 
politics-minded  Congress  could  interfere  in  the  affairs 
of  a  great  industry  like  our  railroad  system  is  appalling, 
and  should  cause  the  people  to  think  twice  before  they 
place  their  very  economic  existence  in  jeopardy. 

All  this  is  not  to  imply  that  private  operation  as  at 
present  conducted  is  not  subject  to  much  criticism,  and 
that  much  actual  mismanagement  does  not  exist.  It  is 
a  relative  matter.  On  the  whole,  and  at  least  for  the 
present,  we  should  seek  our  solution  through  the  agency 
of  private  ownership  and  operation  and  persist  in  our 
experiment  with  Government  regulation.  The  solu- 
tion of  our  immediate  difficulties  should  come  through 
the  development  under  centralized  guidance  of  a  na- 
tional programme  of  co-operation. 

The  project  assumes  two  aspects;  first,  co-operation 
for  savings  in  operating  costs,  which  involves  mainly 
technical  engineering  and  industrial  problems;  and,  second, 
co-operation  among  the  different  agencies  of  transporta- 
tion, which  is  an  economic  and  traffic  problem.  There 
is  not  at  present  sufficient  authority  lodged  in  the  regu- 
lating body  to  accomplish  these  ends.  Properly,  the 


THE  FUTURE  345 

Commission's  authority  has  been  confined  in  normal 
times  to  the  oversight  of  the  carriers.  Only  in  emergen- 
cies is  it  authorized  to  take  the  place  of  the  management 
or  to  require  one  carrier  to  share  its  property  with  an- 
other. How  far  should  this  private-property  right  be  in- 
vaded in  the  interest  of  transportation  as  a  whole?  To 
what  extent  should  co-operation  be  made  compulsory? 
For  it  is  clear  that  without  the  force  of  law  it  will  not  go 
fast  or  far. 

One  method  provided  in  the  new  law  is  that  of  consoli- 
dation, which  would  go  a  considerable  distance  in  pro- 
moting the  programme  of  co-operation  here  advocated.1 
But  consolidation  is  voluntary  with  the  carriers,  and 
there  is  no  evidence  that  it  is  arousing  any  enthusiasm 
among  them.  In  fact,  it  will  probably  get  but  a  little 
way  unless  made  compulsory.  Moreover,  it  has  many 
obstacles,  legal  and  financial,  and  would  take  much  time 
to  complete  even  if  made  compulsory.  Co-operation, 
while  involving  vast  projects  of  wide  extent,  can  be 
undertaken  much  more  speedily  and  can  proceed  from 
the  simpler  to  the  more  elaborate  without  any  upset  of 
existing  structures. 

Suggestions  for  economies  in  operation  through  the 
development  of  co-operative  relationships  between  the 


1  In  support  of  this  contention  is  the  statement  of  Professor  Ripley 
in  his  explanation  of  the  tentative  plan  for  the  consolidation  of  rail- 
roads, prepared  at  the  request  of  the  Interstate  Commerce  Commis- 
sion: "One  of  the  larger  aspects,  then,  of  this  proposed  consolidation 
plan  is  that  it  offers  a  third  choice,  in  place  either  of  completely  uni- 
fied regional  ownership  and  operation  with  its  lack  of  incentive,  on 
the  one  hand,  or  of  the  economic  wastes  which  are  incident  to  helter- 
skelter  competition  between  a  heterogeneous  congeries  of  more  or  less 
imperfectly  developed  properties,  on  the  other.  One  alternative 
threatens  stagnation;  the  other  has  driven  our  railroads  to  the  verge 
of  bankruptcy.  May  not  a  well-ordered  consolidation  programme  offer 
a  way  out,  without  resorting  to  the  ultimate  expedient  of  Govern- 
ment ownership,  from  which,  once  adopted,  there  can  be  no  with- 
drawal?" 


346  RAILROADS  AND   GOVERNMENT 

roads  have  been  numerous,  but  are  too  technical  to  be 
fully  discussed  here.     A  few  of  them  may  be  mentioned. 

Joint  facilities  and  terminals. 

Standardization  in  construction,  inspection,  and  repair 
of  equipment. 

Purchase  of  fuel  and  supplies. 

Fuel  consumption. 

Locomotive  improvement — electrification. 

Standardization  of  shop  practice. 

Standardization  of  traffic  regulations,  such  as  demur- 
rage, reconsignment,  and  the  like. 

All  of  these  do  not  require  co-operation  among  carriers. 
Some  of  them  would  have  to  be  worked  out  in  detail 
on  each  property.  But  co-operation  in  the  analysis  of 
the  problem  and  in  experimentation  would  materially 
expedite  solution,  and  would  accelerate  the  introduc- 
tion of  the  new  methods  once  agreed  upon,  into  the 
operations  of  each  separate  property. 

The  terminal  problem  is  probably  the  one  in  which 
co-operative  action  will  reap  its  greatest  reward,  includ- 
ing in  this  designation  interchange  and  storage  yards 
and  all  track  facilities  outside  the  main  lines.  The 
underlying  difficulty  with  the  introduction  of  co-opera- 
tion is  the  same  as  in  all  the  other  problems;  namely, 
the  desire  on  the  part  of  management  to  preserve  the  in- 
dividuality of  the  system,  and  an  eagerness,  entirely  com- 
mendable, to  develop  an  esprit  de  corps  on  the  road  and  a 
prestige  for  the  organization  with  shippers  and  public, 
which  results  naturally  in  an  indifference  to  the  interests 
of  adjoining  carriers,  if  not  to  actual  hostility.  Organi- 
zations of  carrier  officers  of  one  sort  or  another  manage 
to  agree  reasonably  well  on  policies  affecting  general 
legislation,  or  on  plans  for  educational  publicity,  but  so 
soon  as  the  discussion  touches  on  a  matter  vital  to  the 


THE  FUTURE  347 

operation  of  an  individual  railroad,  they  begin  to  fall 
apart.  This  was  what  made  the  work  of  the  Railroads' 
War  Board  in  1917  difficult.  It  is  responsible  in  a  mea- 
sure for  the  unhappy  manner  in  which  the  carriers  pre- 
sented their  labor  problems  before  the  Labor  Board  in 
1921. 

The  public  has  permitted  these  terminal  properties 
to  develop  without,  until  recently,  taking  any  serious 
interest  in  their  character  and  location,  and  large  cities 
have  been  provided  with  separate  and  scattered  terminal 
yards  constructed  on  the  theory  that  each  railroad  is  an 
isolated  undertaking  having  no  relation  to  any  other. 
The  result  is  that  consolidation  of  terminal  properties 
becomes  to-day  a  well-nigh  insoluble  problem  because 
of  its  physical  difficulties  and  its  financial  magnitude. 
The  claim  that  any  movement  toward  joint  terminals 
would  be  illegal  under  the  Anti-Trust  Act  has  no  basis 
in  court  decision,  beyond  the  ruling  that  such  terminals 
must  not  be  organized  with  the  purpose  of  preventing 
competition.1  One  of  the  best  illustrations  of  the  termi- 
nal situation  is  found  in  the  application  of  the  New  York 
Central  Railroad  to  the  Commission  for  permission 
to  acquire  the  Chicago  Junction  Railway,2  which  serves 
the  stock-yards  and  adjoining  industries,  and  which  has 
been  used  by  most  of  the  lines  entering  Chicago  for 
switching  and  interchange  purposes.  The  New  York 
Central  desired  exclusive  possession  in  order  to  enlarge 
its  terminal  facilities  and  balance  those  of  the  Pennsyl- 
vania Railroad.  Eight  railroads  intervened  with  the 
Commission  to  prevent  this  consummation  on  the  ground 
that  it  would  result  in  destroying  the  neutrality  of  the 
line  and  the  free  interchange  of  freight.3  A  strict  recog- 
nition of  the  competitive  principle  would  have  permitted 
the  New  York  Central  to  proceed,  but  is  it  in  the  inter- 

*224  U.  S.,  383  (1912).  'Finance  Docket  No.  1165  (1921). 

'Senate  Com.  hearings,  June  28,  1921,  page  914. 


34-8  RAILROADS  AND   GOVERNMENT 

est  of  the  public  as  a  whole  that  this  railroad  should 
monopolize  the  traffic  of  this  enormously  valuable  indus- 
trial district,  or  that  other  roads  should  enter  it  on  terms 
laid  down  by  the  New  York  Central  Railroad?1 

The  same  attitude  of  mind  is  seen  in  the  construction 
of  the  huge  modern  efficient  interchange  yard  for  the 
make-up  and  despatch  of  trains.  All  the  talent  of  the 
engineering  and  operating  staffs  is  devoted  to  carrying 
these  yards  to  the  highest  point  of  efficiency,  but  all  with 
the  thought  of  perfecting  the  operation  of  the  individual 
carrier.  Scarcely,  if  ever,  is  the  proposition  considered 
of  building  such  yards  conjointly  with  neighboring  roads. 
It  is  a  well-recognized  principle  that  the  necessity  of 
breaking  up  trains  en  route  is  the  greatest  obstacle  to 
smooth  and  rapid  railroad  operation.  The  ideal  is  to 
load  a  train  at  point  of  origin  and  run  it  through  solidly 
to  destination  without  any  delay  beyond  what  is  neces- 
sary for  inspection.  Some  notable  results  of  this  kind 
were  achieved  during  federal  operation  when  private 
interests  were  laid  one  side.  There  is  no  reason  now 
except  private  individual  railroad  interest  why  this  prin- 
ciple of  operation  should  not  be  rapidly  extended. 

Many  objections  will  of  course  be  raised  to  this  argu- 
ment. For  example,  valuable  terminals  already  in  exist- 
ence cannot  be  scrapped.  It  is  unfair  that  the  benefits 
of  terminals  should  be  enjoyed  by  roads  that  have  not 
contributed  to  their  development.  The  demands  of 
shippers  require  that  terminals  should  be  distributed 
and  not  concentrated.  But  these  arguments  are  not 
convincing.  Terminals  need  not  be  located  in  one  uni- 
fied area;  belt  lines  can  provide  the  necessary  relation- 


1  This  spirit  of  competition  frequently  leads  to  excessive  investment 
which  the  public  must  indirectly  carry.  Unused  property  purchased 
for  the  future  is  a  competitive  necessity.  It  is  said  that  due  to  dupli- 
cation 70  per  cent  of  the  train-track  capacity  in  the  Chicago  terminals 
is  unused. 


THE  FUTURE  349 

ship.  The  significant  thing  is  the  standardization  and 
the  integration  of  terminal  properties  conducted  as  ad- 
ministrative units  instead  of  the  present  extreme  indi- 
vidualistic competitive  arrangement. 

Competition  has  had  the  effect  of  offering  service  at 
terminals  at  a  cost  in  excess  of  the  revenue  received. 
Yet  carriers  persist  in  this  policy,  many  of  them,  appar- 
ently, being  only  vaguely  aware  of  the  actual  situation. 
We  need  thorough  enlightenment  on  the  subject  of 
terminal  costs  in  order  to  establish  a  basis  for  scientific 
rate  making  and  one  upon  which  sound  competition  with 
other  agencies  can  be  constructed.  At  present  little  is 
known  of  terminal  costs  in  spite  of  the  fact  that  since 
the  enactment  of  the  original  Act  in  1887  carriers  have 
been  required  to  file  schedules  of  rates  which  should 
state  separately  all  terminal  or  other  charges  that  the 
Commission  might  require  and  "any  rules  or  regula- 
tions which  in  any  wise  change,  affect  or  determine  any 
part  or  the  aggregate"  of  the  rates.1  Testimony  has 
been  developed  in  various  cases  showing  that  trunk- 
line  carriers  have  expended  more  in  terminal  costs  than 
they  received  for  the  total  haul  of  freight,  thus  actually 
doing  business  at  a  deficit.  Competition  has  driven  the 
roads  remorselessly  along  until  they  are  absorbing  enor- 
mous amounts  in  special  services  which  should  be  re- 
covered from  the  shipper.  The  New  York  Harbor  Case 
in  1917  brought  out  in  a  striking  fashion  the  rapid  and 
disturbing  growth  in  terminal  costs  as  compared  with 
those  of  the  line  haul.  It  pointed  to  the  time  not  far 
distant  when  carriers  can  no  longer  absorb  these  costs 
into  their  hauling  rates  but  must  impose  specific  terminal 
charges.  la  the  Iron  Ore  Rate  Cases2  the  Commission, 
after  prescribing  maximum  dock  charges  and  requiring 
the  carriers  at  these  lower  lake  ports  to  establish  sepa- 
rate rates  for  switching  and  other  services,  stated  that  it 

1  Sec.  6  (i).  24i  I.  C.  C.,  181  (1916). 


350  RAILROADS  AND   GOVERNMENT 

ought  not  to  be  necessary  to  tear  a  rate  apart  in  order 
to  determine  what  proportion  was  intended  as  compen- 
sation for  each  distinct  service.  A  declaration  by  a 
carrier  of  inability  to  dissect  the  rate  is  an  obstruction 
to  effective  regulation. 

It  is,  therefore,  a  fact  of  importance  that  the  statistical 
bureau  of  the  Commission  is  at  work  on  the  problem  of 
separating  line  and  terminal  costs.  It  is  obviously 
absurd  for  the  carriers  to  distribute  all  their  earnings  for 
statistical  purposes  upon  ton-mile  and  car-mile  bases, 
when  in  many  cases  so  large  a  proportion  of  the  cost  to 
which  proportionate  earnings  should  be  assigned  is  in- 
curred in  terminal  service  into  which  the  element  of 
distance  and  carriage  does  not  enter. 

Another  problem  of  long  standing  is  that  of  the  effi- 
cient distribution  of  equipment.  The  existence  of  a 
y  shortage  of  cars  in  one  section  of  the  country  coincident 
with  a  surplus  in  another  is  a  visible  evidence  of  the  in- 
competency  of  our  railroad  service  as  a  national  agency. 
For  years  the  matter  has  been  under  discussion  and  pro- 
posals have  been  made  for  the  pooling  of  a  certain  pro- 
portion of  the  equipment  under  centralized  manage- 
ment, to  be  used  as  a  "flying  squadron"  that  should 
meet  the  emergencies  in  various  sections  of  the  country. 
But  always  the  plan  has  been  defeated  by  the  selfish- 
ness of  some  few  of  the  carriers. 

Purchase  of  fuel  and  supplies  on  a  co-ordinated  basis 
has  obvious  economies.  The  study  of  fuel  consumption 
should  be  undertaken  on  a  comprehensive  scale  through 
the  co-operation  of  all  the  carriers.  Experts  insist  that 
the  surface  of  this  question  has  hardly  been  scratched. 

Sufficient  has  been  said  to  illustrate  the  point.  Sav- 
ings on  the  scale  necessary  to  put  transportation  service 
on  a  permanently  solvent  basis  can  only  be  undertaken 
by  the  carriers  working  on  a  national  scale,  and  with  an 
eye  to  the  situation  as  a  whole  rather  than  to  the  effect 


THE  FUTURE  351 

upon  the  individual  property.  For  this  reason  the  pro- 
posals put  forward  by  the  Association  of  Owners  of  Rail- 
road Securities  in  the  spring  of  1921  warrant  careful 
public  consideration.  This  association  had  already  se- 
cured in  the  Sundry  Civil  Appropriations  Act  of  June  5, 
1920,  an  amendment  providing  for  loans  to  railroads 
during  the  guarantee  period  (March  to  September,  1920), 
in  which  the  Commission  was  given  power  to  designate  an 
agency  as  appropriate  for  the  construction  and  sale  or 
lease  of  equipment  to  carriers.  Acting  upon  this  author- 
ity, the  Commission  had  designated  the  National  Railway 
Service  Corporation  chartered  in  Maryland  at  the  in- 
stance of  the  Association  of  Owners  of  Railroad  Securi- 
ties and  serving  without  profit,  as  a  central  equipment 
agency.  Aided  by  loans  from  the  Government  out  of 
the  $300,000,000  revolving  fund  provided  for  emergency 
purposes  during  this  guarantee  period,  it  had  supplied 
equipment  to  railroads  under  terms  of  conditional  sale 
or  lease.  The  Commission  had  made  loans  up  to  40  per 
cent  of  the  value  of  the  equipment  and  the  Service  Cor- 
poration had  sold  trust  certificates  for  the  remaining 
60  per  cent,  largely  to  the  members  of  the  Association 
of  Owners  of  Railroad  Securities,  that  is,  to  the  insurance 
companies  and  savings-banks.  The  total  of  certificates 
sold  amounted  on  July  i,  1921,  to  $33,000,000. 

In  July  1921,  the  Association  of  Owners  of  Railroad 
Securities  presented  to  the  Senate  Committee  a  most 
elaborate  plan  for  the  development  of  the  co-operative 
principle,  and  testimony  was  offered  by  the  members  of 
its  Board  of  Economics  and  Engineering,1  consisting  of 
eminent  engineers  who  were  analyzing  the  problem  here 
under  discussion.  The  proposals  of  this  association  in- 
volve the  national  incorporation  of  the  service  agency 
already  described,  with  power  not  only  to  aid  railroads 
by  selling  them  equipment  on  the  car  trust  plan,  but 
1  Senate  Committee  hearings,  June  22,  1921,  page  797. 


352  RAILROADS  AND   GOVERNMENT 

to  build  and  own  equipment  and  serve  as  a  pool  for  the 
balancing  of  equipment  needs  in  various  parts  of  the 
country.  The  remainder  of  their  proposals  involve  a 
somewhat  cumbersome  organization  designed  to  study 
and  develop  and  eventually  put  into  effect  co-operative 
economies  of  nation-wide  scope,  the  whole  scheme  being 
headed  up  in  the  Interstate  Commerce  Commission, 
which  is  to  have  supervisory  power.  The  particular 
plan  is  not  of  great  significance  for  this  discussion.  The 
important  thing  is  that  it  has  been  proposed  and  that 
the  Interstate  Commerce  Committee  of  the  Senate  has 
it  under  consideration. 

One  other  phase  of  the  operating  problem  will  need  to 
be  grappled  in  thoroughgoing  fashion  before  satisfactory 
results  will  be  forthcoming.  That  is  the  relation  of  labor 
to  the  industry.  The  railroad  labor  problem  has  this 
feature  that  distinguishes  it  from  the  issue  in  most  other 
industries.  It  is  a  public  occupation  in  which  the  sense 
of  responsibility  to  the  patrons  must  needs  be  keener 
than  elsewhere.  Otherwise  the  principles  involved  are 
not  essentially  different  from  those  of  the  labor  problem 
in  general.  But  the  solution  of  the  problem  is  compli- 
cated by  the  character  and  organization  of  the  business. 
The  industry  is  of  enormous  size,  decentralized  into  a 
large  number  of  independent  operating  units  with  work- 
ers classified  into  a  multitude  of  occupations.  For  years 
each  railroad  endeavored  to  settle  its  own  labor  problems 
without  regard  to  settlements  on  other  roads,  and  even 
with  the  development  of  national  organizations  of  man- 
agement and  men,  there  was  extraordinary  diversity  of 
policy  among  the  different  carriers.  Federal  control 
did  much  to  unify  and  standardize  relations,  and  the 
effort  of  the  carriers  since  has  been  to  rid  themselves  of 
these  national  agreements  and  restore  the  local  rela- 
tionship. 

There  is  here  present  that  conflict  which  is  evident 


THE   FUTURE  353 

throughout  the  labor  world  wherever  a  solution  of  the 
problem  is  being  sought,  the  struggle  for  organization 
on  a  national  scale  on  the  one  hand,  and  on  the  other  the 
effort  to  preserve  local  negotiation  and  the  co-operation  of  y 
the  individual  workers  in  the  solution  of  the  problems  of 
the  individual  plant.  National  organization  has  done 
much  and  will  do  more  to  improve  the  lot  of  the  indi- 
vidual workman  on  the  individual  railroad.  It  has  stood 
between  him  and  the  exploiting  policy  of  a  hostile  man- 
agement. Its  efficacy  and  its  right  to  be  are  recognized 
by  the  Labor  Board  in  ruling  that  workers  may  choose 
as  conferees  in  negotiations  with  management  officers  of 
their  organizations  who  are  not  employees  of  the  road 
concerned.  But  national  organization  has,  in  multitudes 
of  cases,  prevented  co-operation  between  management  and 
men  on  an  individual  property,  because  the  national 
officers,  fearful  of  the  possible  undermining  influence  of 
such  procedure,  have  elected  to  direct  all  questions  of 
policy  from  national  headquarters. 

National  organization  as  a  medium  of  negotiation  be- 
comes a  cold  business  transaction  robbed  altogether  of 
the  human  element.  It  inevitably  means  that  the  good- 
will of  the  employer  is  to  be  expressed  alone  in  the  pay- 
envelope,  which  Mr.  Gompers  is  reported  to  have  ap- 
proved as  the  policy  of  the  American  Federation  of 
Labor.  But  the  inevitable  result  is  an  armed  truce. 
It  does  not  mean  co-operation  or  efficiency.  It  means 
war,  and  as  little  work  for  as  large  pay  as  possible. 

On  the  other  hand,  a  complete  decentralization  of 
industrial  relations  would  be  equally  disastrous.  We 
should  be  thrown  back  to  the  confusion  of  pre-union 
days.  On  some  roads  co-operation  would  be  admirably 
developed,  with  ample  recognition  of  labor  in  joint  counsel. 
On  other  roads  despotism  would  prevail,  which  might  be 
successful  as  a  policy  so  long  as  the  tyrant  was  benevo- 
lent, but  which  would  result  in  revolution  when  his  arbi- 


354  RAILROADS  AND  GOVERNMENT 

trary  successor  came  upon  the  scene.  Some  manage- 
ments would  encourage  unionism,  some  would  tolerate 
it,  some  would  oppose  it.  From  the  standpoint  of  the 
country  as  a  whole,  there  would  be  no  assurance  that 
labor  would  obtain  justice,  neither  would  there  be  any 
considerable  degree  of  co-operation  between  manage- 
ment and  men. 

The  solution  probably  lies  somewhere  between.  If 
national  union  organization  is  to  continue  and  receive 
public  support,  it  must  show  itself  far  more  elastic  than 
it  has  been  in  the  past.  National  agreements  must 
give  room  for  a  flexible  adjustment  to  local  needs,  an 
adjustment  to  be  effected  not  by  national  officers  but 
by  local  conference.  Moreover,  the  unions  will  have  to 
yield  in  the  matter  of  individual  participation  in  manage- 
ment. A  persistence  in  the  policy  of  refusing  to  permit 
local  participation  in  management  for  fear  of  under- 
mining the  union  will  eventually  result  in  wrecking  the 
union  itself.  For  only  through  local  participation  is 
that  spirit  of  loyalty  to  the  industry  to  be  restored  which 
has  been  destroyed  during  the  last  two  decades,  and 
only  through  this  spirit  of  loyalty  is  that  efficiency  to 
be  created  which  the  public  is  rightfully  demanding. 

If  the  Railroad  Labor  Board  is  equal  to  its  task,  and, 
conceiving  the  problem  in  its  national  aspect,  is  able  to 
evolve  a  labor  code  that  will  commend  itself  to  both 
sides,  and  if  it  is  capable  of  establishing  that  nice  adjust- 
ment between  national  organization  essential  to  the 
preservation  of  fundamental  rights,  on  the  one  hand, 
and  local  negotiation  essential  to  the  preservation  of 
operating  efficiency,  on  the  other,  it  will  have  performed 
a  service  of  extraordinary  value  to  the  industry  and  the 
public.  Labor  must  be  given  a  larger  share  of  interest 
in  the  industry.  Its  sense  of  responsibility  must  not  be 
deadened  by  confining  its  relation  to  the  pay-envelope, 
the  contents  of  which  are  arranged  for  by  the  negotia- 


THE  FUTURE  355 

tion  between  organized  and  hostile  groups.  It  was  a 
mistake  to  eliminate  from  the  Esch-Cummins  Act  the 
provision  under  which  labor  was  to  share  in  the  excess 
earnings  above  6  per  cent,  which  now  go  to  the  carrier 
and  the  Government.  Some  profit-sharing  provision  of 
this  nature  should  be  operative,  sufficiently  direct  in 
its  effect  to  stimulate  efficiency  and  develop  morale  in 
the  working  organization.  But,  more  than  this,  man- 
agement must  look  forward  to  the  time  not  far  distant 
when  it  must  admit  labor  into  the  inner  circles  and  give 
it  a  voice  in  management.  There  is  much  sound  advice 
and  wisdom  to  be  gained  from  the  more  intelligent  of  the 
working  force.  Yet  the  advantage  is  not  to  the  greatest 
degree  to  be  found  in  the  contributions  thai  labor  makes. 
Rather  will  it  grow  out  of  the  fact  that  labor  knows  what 
is  going  on,  appreciates  the  problems  of  management, 
and  hence  acquires  confidence.  This  all  works  for  con- 
servatism in  judgment,  deliberateness  in  reaching  criti- 
cal decisions,  and  the  development  of  a  sense  of  responsi- 
bility. There  is  no  greater  source  of  savings  to-day  than 
is  to  be  found  in  the  development  of  the  proprietorship 
spirit  in  the  working  force.  This  does  not  necessarily 
mean  that  employees  must  sit  on  the  boards  of  directors. 
The  result  can  be  accomplished  through  other  means;  for 
example,  through  properly  organized  conference  boards 
after  the  order  of  the  Whitley  Councils  in  England. 
The  particular  form  of  organization  is  not  significant. 
What  is  required  is  that  labor  should  feel  that  it  is  being 
given  the  opportunity  to  discuss  and  advise  with  refer- 
ence to  fundamental  problems  of  management,  and  that 
none  of  the  facts  of  the  situation  is  being  withheld. 

Organized  labor  has  not  thus  far  shown  the  same  sense 
of  responsibility  to  the  public  that  management  has 
displayed,  neither  has  it  so  clearly  appreciated  the  public 
nature  of  the  industry  in  which  it  is  employed.  Doubt- 
less this  is  due  to  the  fact  that  it  has  had  to  take  the 


356 


RAILROADS  AND   GOVERNMENT 


offensive  in  fighting  its  battles  against  an  intrenched 
position,  and  that  until  its  battle  was  won  it  had  to  con- 
centrate on  what  seemed  to  be  a  wholly  selfish  objective. 
But  if  it  is  to  win  any  continuous  support  from  the 
public,  it  will  have  to  make  clearer  than  it  has  yet  done 
that  the  public  interest  is  not  only  not  being  disregarded, 
but  that  it  is  being  given  first  place  in  the  minds  of  the 
workers. 

And  this  means  that  labor  must  prepare  itself  to  aban- 
don the  strike  and  confine  itself  to  arbitration  as  a  means 
of  adjusting  labor  controversies.  It  is  fortunate  that 
the  proposal  of  this  nature  in  the  Cummins  Bill  failed 
to  become  law,  for  we  are  not  yet  fully  prepared  for  it, 
and  a  premature  trial  of  compulsory  arbitration  might 
have  postponed  its  effective  working  for  many  years. 

Every  one  recognizes  the  necessity  for  uninterrupted 
transportation.  The  utter  dependence  of  the  public 
upon  transportation  service  gives  it  a  legitimate  interest 
in  the  causes  of  interruption  and  a  justifiable  ground 
for  interference.  There  is  no  doubt  that  both  capital 
and  labor  should  be  required  to  accept  service  in  this 
industry  subject  to  a  limitation  upon  their  freedom  of 
action  in  the  settlement  of  their  disputes.  But  it  is 
quite  a  different  thing  suddenly  to  incorporate  the  prin- 
ciple of  compulsory  arbitration  into  law,  and  impose  it 
upon  a  group  of  employees  just  emerging  from  the  restric- 
tions of  Government  employment  into  which  they  were 
drafted  for  war  purposes,  a  group  long  in  service  with 
many  valuable  seniority  rights,  and  in  large  degree  un- 
fitted by  age  and  service  to  seek  an  alternative  employ- 
ment. But  the  public  should  give  warning  in  some 
unmistakable  fashion  that  settlement  of  disputes  in 
public-service  industries  must  be  accomplished  by  peace- 
ful means,  and  that  labor  must  prepare  itself  for  a  speedy 
realization  of  this  programme.  This  involves  the  obli- 
gation on  the  part  of  the  public  to  create  a  tribunal  in 


THE  FUTURE  357 

which  the  administration  of  justice  is  assured.  It  in- 
volves the  establishment  by  law  of  certain  fundamental 
rights  of  labor,  which  might  be  called  a  labor  code.  A 
beginning  has  been  made  in  the  instructions  laid  down  by 
Congress  for  the  guidance  of  the  Railroad  Labor  Board 
in  the  fixing  of  wages,  considerations  which  the  board  is 
required  to  take  into  account  when  determining  the 
reasonableness  of  wages  and  working  conditions.  And 
this  encouraging  beginning  has  been  followed  up  by  a 
more  elaborate  set  of  provisions  drawn  by  the  board 
itself.  With  the  fundamental  rights  of  labor  assured, 
and  with  an  informed  and  high-minded  arbitration  body 
in  existence,  there  should  be  no  more  difficulty  in  ad- 
justing labor  disputes  peaceably  than  there  is  in  the  set- 
tlement of  ordinary  cases  at  law.  In  the  substitution 
of  the  modern  law-court  for  the  old  trial  by  battle,  we 
have  an  exact  parallel  to  our  existing  problem.  The 
substitution  of  an  impartial  tribunal  for  the  strike  is 
fully  justified  on  the  same  broad  grounds  of  public  policy. 
With  such  a  tribunal,  the  argument  of  involuntary  servi- 
tude, whatever  slight  plausibility  it  may  have  had  be- 
fore, falls  to  the  ground. 

All  this  has  related  to  the  details  of  operation.  But 
a  problem  of  greater  public  interest,  if  not  of  greater 
importance,  is  that  of  the  proper  co-ordination  of  the 
different  agencies  of  transportation.  We  have  experi- 
mented with  many  types  of  transportation  in  the  past  and 
doubtless  there  will  be  many  new  types  forthcoming. 
But  at  present  there  are  but  two  agencies  that  perform 
any  significant  service  other  than  railroads — certain  types 
of  water  and  highway  transportation.  We  are  here 
considering  the  subject  in  its  larger  aspects  and  with 
reference  to  the  more  substantial  economies.  Hence, 
we  can  disregard  interurban  electric  transportation, 
which  has  confined  itself  in  large  degree  to  passenger 


358  RAILROADS  AND   GOVERNMENT 

service,  a  phase  of  transportation  useful  and  necessary, 
but  of  relatively  little  interest  to  the  railroads  as  a  whole 
from  the  standpoint  of  net  earnings.  The  interurbans 
might  absorb  all  of  the  short-distance  passenger  trans- 
portation without  seriously  affecting  the  railroads  of 
the  country  as  a  whole.  And  the  interurbans  are  in 
their  turn  facing  a  competition  from  the  individual 
automobile  that  threatens  their  eventual  elimination. 

For  distances  of  40  miles  and  less  the  motor-truck  is 
at  present  in  many  parts  of  the  country  a  serious  com- 
petitor in  freight  traffic.  In  New  England  it  threatens 
the  very  existence  of  the  railroads.  Its  development  has 
been  extraordinary  since  the  war,  and  only  the  obstacle 
of  inadequate  highways  has  prevented  a  still  more  phe- 
nomenal growth.  That  there  must  eventually  be  some 
sort  of  co-operation  between  motor-truck  and  railroad,  and 
a  tacit  division  of  territory,  seems  fairly  evident.  But 
what  is  needed  first  of  all  is  information  as  to  costs  of 
highway  transportation  properly  assigned  to  their  differ- 
ent categories,  based  upon  a  survey  that  is  scientific  and 
wholly  uninfluenced  by  ulterior  motives.  At  present  our 
information  relating  to  motor-truck  transportation  is  con- 
fined to  a  few  items  of  operating  cost,  furnished  by  some 
of  the  larger  motor-truck  transportation  companies. 
Most  of  the  information  of  this  character  emanates  from 
concerns  manufacturing  either  trucks  or  accessories,  and 
their  literature  is  largely  directed  to  a  beguiling  of  the 
public  into  the  construction  of  improved  highways  upon 
which  they  can  operate  untrammelled  and  untaxed. 
Nothing  whatever  is  said  of  the  fundamental  construc- 
tion costs  for  right  of  way,  which  the  public  pays,  nor  of 
the  enormous  rate  of  depreciation  on  the  plant,  which 
likewise  comes  out  of  the  public's  pocket.  Toward  this 
increasing  capital  investment  and  depreciation  expense 
the  motor-truck  contributes  a  trifling  license  fee,  which 
falls  far  short  of  meeting  its  public  obligation. 


THE  FUTURE  359 

On  the  other  hand,  the  railroads  have  acquired  often 
at  great  expense  their  rights  of  way,  and  must  maintain 
and  improve  them  out  of  their  earnings.  To  be  sure, 
much  land  for  right-of-way  purposes  was  given  the  rail- 
roads, but  under  agreements  by  which  they  have  at  least 
in  part  returned  the  gift.  Moreover,  the  public  has 
profited  through  the  development  of  the  country  to  a 
far  greater  extent  than  the  value  of  the  lands  given. 
That  the  mo  tor- truck  has  a  permanent  place  in  the  trans- 
portation system  there  seems  to  be  little  doubt.  It 
serves  a  real  need  in  its  direct  pick-up  and  delivery  ser- 
vice. While  its  ton-mile  costs  for  actual  transportation 
are  far  in  excess  of  the  railroad  costs,  it  avoids  the  heavy 
terminal  expense,  and  even  when  imposed  with  capital 
charges  for  its  fair  proportion  of  highway  construction 
and  maintenance,  it  will  furnish  a  superior  service  for 
short  hauls.  Its  success  in  transportation  for  longer 
distances,  100  to  30x5  miles,  is  due  rather  to  the  ineffi- 
ciency of  its  competitor  than  to  its  own  fundamental 
superiority,  combined,  of  course,  with  its  exemption  from 
nearly  all  legitimate  charges.  What  is  urgently  needed 
is  a  survey  that  will  furnish  the  public  the  facts  upon 
which  to  construct  a  programme  of  scientific  co-opera- 
tion. 

This  same  problem  arises  in  the  case  of  water  trans- 
portation. The  Panama  Canal  was  constructed  at  public 
expense  to  furnish  a  through  water  route  from  coast  to 
coast  in  competition  with  the  railroads,  and  the  policy 
is  now  being  strongly  urged  of  abolishing  all  canal  tolls 
on  coastwise  shipping.  Or,  again,  public  money  is  ex- 
pended in  the  improvement  of  the  Ohio  and  lower  Missis- 
sippi to  increase  the  safety  and  promote  the  regularity 
of  river  transportation,  and  projects  are  urged  at  na- 
tional expense  for  the  construction  of  adequate  transfer 
facilities  in  order  to  make  water  transportation  more 
attractive.  Legislation  has  from  time  to  time  been 


360  RAILROADS  AND   GOVERNMENT 

enacted  in  an  effort  to  prevent  the  more  efficient  railroad 
from  taking  business  away  from  the  less  efficient  water- 
way. How  far  is  the  public  justified  from  the  social  and 
economic  standpoint  in  continuing  its  policy  of  subsi- 
dizing other  forms  of  transportation? 

The  country  is  under  no  moral  obligation  to  confine 
itself  to  railroad  transportation  and  scorn  all  other, 
merely  because  it  was  first  in  the  field  and  has  made 
an  irrevocable  investment.  Much  of  its  business  could 
not  in  any  case  be  wrested  from  it.  That  which  can  be 
taken  away,  if  drawn  off  by  more  efficient  agencies,  the 
railroads  ought  to  lose.  But  what  part  can  the  public 
properly  play  in  diverting  this  traffic?  The  answer  is 
that  it  is  justified  in  making  the  investment  in  a  highway 
or  a  waterway  to  the  extent  that  economic  results  war- 
rant. If  traffic  responds  appropriately  the  investment 
was  worth  while.  But  the  public  should  see  to  it  that 
it  gets  its  return  in  lowered  rates.  Whether  the  motor- 
truck or  the  steamboat  company  is  adequately  taxed  is  a 
matter  of  public  policy,  but  if  it  is  not  so  taxed,  this  fact 
should  be  taken  into  account  in  the  rates  permitted  to 
be  charged  by  them.  Which  implies  that  these  agencies 
should  not  be  left  uncontrolled  on  the  theory  that  com- 
petition will  give  the  public  the  lowest  practicable  price, 
but  should  be  regulated  as  to  their  charges  exactly  as 
railroads  are  regulated.  In  other  words,  if  the  various 
agencies  looked  at  from  the  public  standpoint  are  placed 
under  the  control  of  a  central  authority,  which  assigns 
them  their  proper  sphere  in  the  co-operative  scheme,  and 
regulates  their  operation  and  their  charges,  much  of  the 
apparent  discrimination  against  the  railroad  industry 
would  disappear.  The  important  point  is  that  we  need 
a  policy,  and  one  that  is  definite  and  constructive. 

So  far  as  water  transportation  is  concerned,  we  as  a 
people  have  spent  our  money  recklessly  and  in  utter 
disregard  of  sound  business  principles.  We  have  pro- 


THE  FUTURE  361 

ceeded  on  the  theory  that  water  transportation  was  ob- 
viously and  always  cheaper  than  rail,  and  if  the  water 
highway  was  once  available,  the  people  would  have  the 
railroads  by  the  throat.  Considerably  over  a  hundred 
millions  have  been  spent  on  the  ditch  known  as  the  New 
York  Barge  Canal,  which,  toll  free,  is  to  furnish  a  cheap 
transportation  to  the  people  of  New  York  State.  But 
the  only  way  in  which  the  project  can  be  made  to  exhibit 
any  economic  justification  is  by  disregarding  capital 
cost  and  the  tax  burden  imposed  on  the  people  of  the 
state.  Enormous  sums  have  been  spent  on  the  Ohio 
and  the  lower  Mississippi  by  the  United  States  Govern- 
ment. So  far  as  these  have  to  do  with  flood  prevention 
they  can  be  justified,  but  from  the  standpoint  of  trans- 
portation they  have  realized  practically  nothing.  To 
be  sure,  there  are  many  reasons  to  be  assigned  for  this 
outcome,  such  as  physical  difficulties  preventing  the 
construction  of  satisfactory  transfer  facilities  with  rail, 
and,  in  some  cases  at  least,  destructive  railroad  rates. 
But  when  all  is  said,  the  fact  remains  that  for  this  sec- 
tion the  railroad  is  clearjy  the  more  efficient  and  cheaper 
agency  and  that  the  Government  has  spent  its  funds 
foolishly. 

Even  the  Panama  Canal,  which  broke  a  narrow  bar- 
rier between  great  navigable  bodies  of  water,  the  con- 
struction of  which  is  clearly  justified  from  the  transpor- 
tation standpoint,  has  thus  far  failed  to  realize  the  bene- 
fits in  lowered  transportation  costs  that  were  naturally 
to  be  expected.  Shipping  has  been  inadequate,  and  the 
boats  available  have  been  able  to  fill  their  holds  at  rates 
that  were  higher  than  a  genuine  competitive  situation 
would  have  presupposed.  However,  this  situation  is 
doubtless  only  temporary,  and  we  shall  probably  see  in 
the  immediate  future  an  actual  realization  to  the  Ameri- 
can people  of  their  investment  in  this  enterprise. 

It  is  the  observation  of  a  railroad  executive  who  has 


362  RAILROADS  AND   GOVERNMENT 

long  been  a  student  of  rail  and  water  competition1  that 
such  competition  is  only  temporary,  that  eventually 
one  agency  or  the  other  takes  the  traffic  according  to 
its  efficiency  and  ability  successfully  to  handle,  and  the 
other  retires  from  the  business.  He  cites  as  instances 
to  support  his  statement  the  coal  business  on  the  Great 
Lakes  and  coastwise  from  Virginia  to  New  England, 
and  the  traffic  between  Southern  cities  and  New  York 
and  Boston,  and  that  on  the  Mississippi  River.  Whether 
this  division  of  traffic  will  be  as  marked  in  the  case  of 
business  from  coast  to  coast  through  the  Panama  Canal 
remains  to  be  seen.  But  certain  it  is  that  there  must 
eventually  be  worked  out,  as  already  advocated  in  the 
case  of  highway  transport,  a  programme  of  co-operation 
between  water  and  rail  that  will  give  to  the  public  the 
economic  benefits  to  be  derived  from  the  presence  of 
both.  This  involves  not  alone  the  determination  whether 
transportation  on  inland  canals,  navigable  rivers,  and  the 
Great  Lakes  is  to  be  developed  and,  if  so,  to  what  extent, 
but  it  involves  the  solution  of  the  terminal  problem  where 
transfer  is  made  between  rail  and  water.  It  is  here  that 
the  good-natured  tolerance  of  the  American  people  has 
been  grievously  taken  advantage  of.  At  the  ports, 
terminal  facilities  have  come  into  the  possession  of  the 
railroads  by  purchase  or  lease,  and  this  possession  has 
been  used  to  compel  exclusive  shipment  over  the  rail- 
road lines  and  to  effect  exclusive  traffic  agreements  with 
specific  steamship  companies.  Ports  have  been  split 
up  into  water-tight  compartments  by  this  railroad  policy. 
No  port  unity  has  existed.  In  fact,  the  possession  of 
monopoly  privileges  by  a  carrier  has  put  that  carrier 
into  active  opposition  to  all  unification  policies.2  Car- 

1  President  Markham,  of  the  Illinois  Central  R.  R.  Co.,  before  the 
National  Rivers  and  Harbors  Congress  in  Dec.,  1920. 

JAn  investigation  has  been  authorized  by  the  Interstate  Commerce 
Commission  of  the  port  situation  at  South  Atlantic  and  Gulf  ports 
in  its  relation  to  rail  carriers. 


THE  FUTURE  363 

riers  that  serve  several  ports  have  centred  their  affection 
upon  one  and  have  diverted  traffic  there,  to  the  detri- 
ment of  other  ports  and  the  injury  of  the  service.  Canals 
may  or  may  not  have  an  economic  justification,  depen- 
dent upon  their  location  and  the  nature  of  the  service 
they  perform,  but  the  public  has  little  opportunity  to 
reach  satisfactory  conclusions  when  the  canals  are  owned 
by  or  leased  to  railroads  that  use  them  only  when  their 
rail  lines  are  congested.  While  physical  difficulties  have 
been  a  deterrent  to  the  development  of  co-operation  of 
rail  carriers  and  river  steamers,  yet  much  more  could 
have  been  done  toward  the  perfection  of  transfer  facili- 
ties if  the  railroads  had  been  interested  in  the  develop- 
ment of  this  type  of  business.  Only  the  pressure  of  pub- 
lic interest  expressed  through  the  regulating  authorities 
will  secure  that  co-operation  between  rail  and  water 
which  has  been  so  long  delayed  without  adequate  justi- 
fication.1 

1  In  this  connection  it  is  pertinent  to  quote  the  following  from  the 
testimony  of  Director-General  Hines  before  the  subcommittee  of  the 
House  Committee  on  Appropriations,  April  12,  1920.  (Hearings,  page 
206.) 

"Now,  in  general,  in  the  past  these  inland  waterways  which  have 
been  improved  by  the  Government  at  very  great  expense  have  been 
in  the  attitude  of  transportation  systems  without  any  feeders  and 
without  any  satisfactory  opportunity  to  make  arrangements  for  inter- 
change traffic.  I  feel  that  since  the  Government  has  invested  so  much 
in  the  improvement  of  the  waterways  through  construction  of  locks, 
dams,  etc.,  and  the  deepening  of  channels,  certainly  an  effort  ought  to 
be  made  to  see  whether  or  not  with  proper  interchange  arrangements 
established,  so  that  on  the  one  hand  the  waterways  can  feed  the  rail- 
roads and  on  the  other  hand  the  railroads  can  feed  the  waterways,  it 
will  not  develop  to  be  a  really  practicable  method  of  transporting  cer- 
tain sorts  of  traffic.  My  best  judgment  about  that  is  that  it  will  turn 
out  to  be  a  desirable  thing.  It  will  vary  as  to  different  waterways. 
Of  course,  the  conditions  are  widely  different.  For  example,  the  New 
York  State  Barge  Canal  is  subject  to  the  condition  that  for  a  good  part 
of  the  year,  when  the  demand  for  traffic  is  most  insistent  and  when 
transportation  on  the  railroads  is  most  difficult,  the  canal  is  frozen  up 
and  is  not  available.  On  the  other  hand,  the  heaviest  traffic  is  in  the 
fall  months,  in  September,  October,  and  November,  when  the  canal  is 


364  RAILROADS  AND   GOVERNMENT 

This  programme  of  co-operation,  contemplating  on  the 
one  hand  the  association  of  the  carriers  in  far-reaching 
policies  for  efficient  operation,  and  on  the  other  a  scien- 
tific allocation  of  the  transportation  work  of  the  country 
among  the  agencies  best  fitted  to  perform  it,  is  one  that 
is  essential  to  the  future  prosperity  of  the  country.  It 
must  be  taken  in  charge  by  some  central  agency  upon 
which  must  be  conferred  adequate  authority.  The 
authority  already  possessed  by  the  Interstate  Commerce 
Commission  and  its  familiarity  with  the  problem  based 
on  long  experience,  suggests  this  body  as  the  natural  one 
to  initiate  a  survey  and  construct  a  programme.  But 
the  Commission,  if  it  is  to  be  effective,  must  be  protected 

available,  and  there  is  a  very  great  deal  of  heavy  traffic  that  can  move 
that  way,  and  I  have  felt  that  it  was  well  worthy  of  developing  the 
experiment  further  to  see  whether  that  canal  could  not  be  successfully 
used  for  that  traffic.  The  Warrior  River  in  Alabama  is  very  little  inter- 
fered with  by  weather  conditions  and  has  a  very  large  traffic  south- 
bound from  the  Alabama  coal-fields,  and  I  feel  there  is  a  very  excellent 
prospect  of  that  justifying  itself. 

"  The  Mississippi  River,  also,  south  of  St.  Louis  is  very  little  inter- 
fered with  by  weather  conditions,  and  south  of  Cairo  is  interfered  with 
still  less,  and  it  seems  to  me  that  that  is  a  very  important  proposition 
that  ought  to  be  developed  further  with  a  reasonable  prospect  of  its 
success.  It  is  hard  to  tell  what  sorts  of  traffic  can  be  most  successfully 
carried,  and  I  believe  there  will  have  to  be  a  good  deal  of  experimenta- 
tion before  anybody  can  settle  down  to  certain  lines  of  traffic  that  can 
be  handled  with  the  greatest  degree  of  economy  and  satisfaction;  but 
my  general  view  is  that  as  to  these  great  waterways  of  the  sorts  I  have 
referred  to,  there  is  a  very  strong  probability  that  it  will  develop  to  be 
in  the  national  interest  and  in  the  promotion  of  national  economy  to 
use  them  for  transportation  of  certain  classes  of  traffic.  For  one 
thing,  I  believe  one  great  difficulty  with  railroad  transportation  has 
been  that  where  the  railroad  traffic  moves  over  a  considerable  distance, 
unless  it  is  given  preferred  movement,  like  perishables  or  like  these 
merchandise  cars,  the  movement  is  rather  uncertain,  and  you  can  count 
with  a  good  deal  more  certainty  on  when  a  boat  which  leaves  one  end 
of  a  line  on  one  day  is  going  to  reach  the  other  end  of  it  than  you  can 
when  a  car-load  of  traffic  is  going  to  reach  destination,  and  it  has  oc- 
curred to  me  that  that  would  be  a  distinct  advantage  with  river  move- 
ments as  to  some  forms  of  traffic.  On  the  whole,  I  feel  that  the  experi- 
ment is  well  worth  carrying  forward  and  ought  to  be  done  with  the 
expectation  that  it  would  be  successful  as  to  certain  classes  of  traffic." 


THE   FUTURE  36  £ 

in  its  administrative  independence.  It  must  consist  of 
men  who  are  or  may  quickly  become  experts  in  this 
complex  field,  and  they  must  feel  free  to  take  such  steps 
as  their  expert  judgment  dictates.  Moreover,  their 
position  is  semijudicial  in  character,  and  their  judgments 
and  their  anticipated  decisions  must  no  more  be  tam- 
pered with  than  are  those  of  the  Supreme  Court.  It  is 
important  to  insist  upon  this  position  of  independence, 
for  there  are  many  disturbing  indications  that  the  execu- 
tive branch  of  the  Government  in  Washington  is  conceiv- 
ing it  to  be  its  duty  to  bring  its  powerful  political  influ- 
ence to  bear  upon  the  Interstate  Commerce  Commission 
in  the  interest  of  policies  held  to  be  for  the  public  welfare. 
Possibly  as  a  consequence  of  our  experience  with  federal 
operation,  and  also  because  of  the  Government's  large 
financial  stake  in  the  industry,  we  have  come  to  regard 
the  Commission's  relations  to  the  roads  and  the  Govern- 
ment's relation  to  the  Commission  in  a  different  light 
than  we  did  in  1916  and  earlier.  But  it  is  a  tendency 
that  should  be  checked  at  the  outset.  It  is  a  dangerous 
and  undermining  influence.  If  persisted  in,  it  will 
wreck  our  great  experiment  in  railroad  regulation,  which 
alone  gives  promise  of  offering  in  the  distant  future  a 
clear  road  out  of  our  difficulties. 


APPENDIX  I 

BIBLIOGRAPHICAL    NOTE 

The  sources  of  information  for  an  exhaustive  study  of  this 
period,  1910  to  1921,  are  to  be  found  in  official  documents.  In 
the  first  place,  students  should  examine  carefully  the  Decisions  of 
the  Interstate  Commerce  Commission,  usually  designated  by  the 
technical  name  of  Reports.  Volumes  18  to  57  cover  the  period 
discussed  in  this  book.  There  is  no  other  material  at  all  compara- 
ble with  this  in  its  wealth  of  information  concerning  industrial, 
commercial,  and  transportation  conditions  in  the  United  States. 
The  rendering  of  a  rate  decision  necessitates  an  analysis  of  the 
factors  upon  which  a  reasonable  rate  must  be  based,  and  this 
analysis  is  invaluable  for  the  student  of  American  industrial  his- 
tory. In  addition  to  the  Decisions  of  the  Commission,  the  Annual 
Reports  of  the  Commission  to  Congress  and  the  annual  volume, 
much  delayed  in  publication,  called  Statistics  of  Railways  in  the 
United  Stales,  should  be  consulted. 

There  has  been  a  plethora  of  congressional  hearings  during  the 
decade,  that  have  had  to  do  with  railroad  affairs.  They  are  worth 
reading  because  in  most  of  them  the  railroad  problem  is  under 
discussion  in  its  broader  aspects,  and  every  phase  of  the  problem 
and  every  point  of  view  finds  expression  here  at  some  time  or 
other.  The  most  important  of  these  hearings  are  listed  herewith: 

Hearings  before  Joint  Committee  on  Interstate  and  Foreign 
Commerce,  64th  Cong.,  ist  Sess.,  Nov.  20,  1916,  to  Dec.  19, 
1917. 

Hearings  before  Senate  Committee  on  Interstate  Commerce, 
65th  Cong.,  3d  Sess.,  on  Extension  of  Tenure  of  Government 
Control,  January  3  to  February  21,  1919. 

Hearings  before  House  Committee  on  Interstate  and  Foreign 
Commerce,  66th  Cong.,  ist  Sess.,  July  15  to  August  19,  1919. 

Hearings  before  Senate  Committee  on  Interstate  Commerce, 
6?th  Cong.,  ist  Sess.,  on  Railroad  Revenues  and  Expenses, 
May  10  to  July  i,  1921. 

36? 


368  APPENDIX  I 

Hearings  before  House  Committee  on  Interstate  and  Foreign 
Commerce,  6yth  Cong.,  ist  Sess.,  on  the  Railroad  Funding 
Bill,  August,  1921. 

Hearings  before  subcommittee  of  House  Committee  on  Appro- 
priations, 66th  Cong.,  2d  Sess.,  on  Appropriations  for  Federal 
Control,  April  7,  1920. 

The  best  source  of  material  on  the  war  administration  of  the  rail- 
roads is  to  be  found  in  the  reports  issued  at  various  times  by  the 
Director-General,  some  comprehensive  in  scope  and  issued  directly 
from  his  office,  but  the  major  portion  the  reports  of  his  various 
divisions  and  of  his  regional  directors.  In  addition,  there  have 
been  published  volumes  containing  the  proclamations,  general 
orders,  circulars,  and  bulletins  issued  by  the  President  and  the 
Director-General  and  his  subordinates. 

For  a  presentation  of  the  railroad  point  of  view  during  the 
entire  period,  there  is  no  better  source  than  the  files  of  the  Railway 
Age.  This  periodical,  edited  with  great  ability  by  Samuel  O. 
Dunn,  while  frankly  an  advocate  of  the  railroads'  cause,  main- 
tains the  position  of  a  friendly  critic  with  decided  success. 

The  Association  of  Railway  Executives,  which  is  sustained  by 
nearly  all  the  railroads  of  the  country,  issues  from  time  to  time 
statements  and  discussions  that  explain  and  defend  the  railroads' 
position.  This  publicity  work  has  been  in  competent  hands.  Its 
statements  of  fact  are  to  be  accepted  as  a  rule  at  their  face  value. 
Its  arguments  and  opinions  are  frankly  and  necessarily  partisan. 

The  Bureau  of  Railway  Economics,  established  by  the  railroads 
in  1910,  has  earned  a  well-deserved  reputation  for  scientific  and 
accurate  handling  of  statistical  material.  As  a  rule,  it  confines 
itself  to  statements  of  fact  and  refrains  from  partisan  presentation. 
Its  publications  should  be  consulted  in  addition  to  those  of  the 
Interstate  Commerce  Commission,  as  it  aims  to  interpret  the  offi- 
cial statistics  and  put  them  into  a  form  more  readily  grasped  by 
the  non-technical  reader. 


APPENDIX  II 

TENTATIVE  PLAN  FOR  RAILROAD  CONSOLIDATION 

The  following  scheme  for  the  consolidation  of  the  railroads  of 
the  United  States  "into  a  limited  number  of  systems"  has  been 
promulgated  by  the  Commission  as  a  tentative  plan,1  in  compliance 
with  the  mandate  of  the  Transportation  Act  of  1920,  Section  5 
(4  and  5).  The  plan  originally  prepared  at  the  request  of  the  Com- 
mission by  Professor  William  Z.  Ripley,  of  Harvard  University, 
has  been  somewhat  altered  by  the  Commission  to  minimize  the 
dismemberment  of  existing  lines.  It  has  been  made  public  for 
the  purpose  of  eliciting  "a  full  record  upon  which  the  plan  to  be 
ultimately  adopted  can  rest." 

SYSTEM  No.  i. — NEW  YORK  CENTRAL 

New  York  Central. 

Pittsburgh  &  Lake  Erie. 

Rutland. 

Michigan  Central. 

Chicago,  Kalamazoo  &  Saginaw. 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis. 

Cincinnati  Northern. 
Western  Maryland. 
Fonda,  Johnstown  &  Gloversville. 
Lake  Erie  &  Pittsburgh. 
Central  Indiana. 

Pittsburgh,  Chartiers  &  Youghiogheny. 
Monongahela. 
Boston  &  Maine. 
Maine  Central. 
Bangor  &  Aroostook. 

And  all  railway  properties  controlled  by  the  above  carriers  through 
lease,  stock  ownership,  or  otherwise,  except: 

Lake  Erie  &  Western  and  Toledo  \  Both    now   controlled   by 
&  Ohio  Central.  /     New  York  Central. 

„          .„    0  „,    .  ,  „         ,1  Both  now  controlled  by 

Zanesville  &  Western  and  Kanawha  I      ^  ,   ,     s    ^i-     p. 

0  ,,.  , .  >     Toledo  &  Ohio  Cen- 

&  Michigan.  J      ^ 

» 63  I.C  C.,455. 

369 


370  APPENDIX  II 

Indiana  Harbor  Belt,  now  controlled  by  New  York  Central, 
30  per  cent;  Michigan  Central,  30  per  cent;  Chicago  &  North 
Western,  20  per  cent;  Chicago,  Milwaukee  &  St.  Paul,  20 
per  cent. 

NOTE. — Prof.  Ripley  recommends  the  inclusion  of  the  Western 
Maryland  in  system  No.  5,  Nickel  Plate-Lehigh  Valley. 

Prof.  Ripley  makes  no  specific  assignment  of  the  Fonda,  Johnstown 
&  Gloversville. 

The  Lake  Erie  &  Pittsburgh,  Central  Indiana,  Pittsburgh,  Chartiers 
&  Youghiogheny,  and  Monongahela  may  be  incorporated  in  either 
system  No.  I  or  No.  2.  Prof.  Ripley  makes  no  specific  assignment 
of  these  four  roads,  which  are  controlled  jointly  in  the  interest  of  the 
New  York  Central  and  the  Pennsylvania. 

The  Boston  &  Maine,  Maine  Central,  and  Bangor  &  Aroostook  may 
be  included  in  system  No.  7,  New  England,  or  system  No.  7a,  New 
England-Great  Lakes.  Prof.  Ripley  rejects  the  trunk-line  treatment 
of  the  New  England  roads,  but  we  present  this  alternative  with  a  view 
to  developing  the  situation  upon  hearing. 

The  Lake  Erie  &  Western  may  be  included  in  system  No.  5,  Nickel 
Plate-Lehigh  Valley. 

The  Toledo  &  Ohio  Central,  Zanesville  &  Western,  and  Kanawha  & 
Michigan  may  be  included  in  system  No.  9,  Norfolk  &  Western. 

The  Indiana  Harbor  Belt  is  reserved  for  consideration  in  connection 
with  terminal  situations. 

SYSTEM  No.  2. — PENNSYLVANIA 
Pennsylvania. 

West  Jersey  &  Seashore. 

Long  Island. 

Baltimore,  Chesapeake  &  Atlantic. 

Cumberland  Valley. 

Maryland,  Delaware  &  Virginia. 

New  York,  Philadelphia  &  Norfolk. 
Pittsburgh,  Cincinnati,  Chicago  &  St.  Louis. 

Waynesburg  &  Washington. 
Grand  Rapids  &  Indiana. 
Cincinnati,  Lebanon  &  Northern. 
Ohio  River  &  Western. 
Louisville  Bridge  &  Terminal. 
Wheeling  Terminal. 
Toledo,  Peoria  &  Western. 
Lorain,  Ashland  &  Southern. 
Lake  Erie  &  Pittsburgh. 
Central  Indiana. 


APPENDIX  II  371 

Pittsburgh,  Chartiers  &  Youghiogheny. 

Monongahela. 

And  all  other  railway  properties  controlled  by  any  of  the  above 
carriers  under  lease,  stock  ownership,  or  otherwise,  except  the 
Norfolk  &  Western  and  railway  properties  controlled  by  it, 
which  may  be  included  in  system  No.  9,  Norfolk  &  Western. 

NOTES. — The  Lorain,  Ashland  &  Southern  may  be  included  in  sys- 
tem No.  4,  Erie,  which  owns  one-half  the  stock,  the  Pennsylvania 
owning  the  other  half. 

The  Lake  Erie  &  Pittsburgh,  Central  Indiana,  Pittsburgh,  Chartiers 
&  Youghiogheny,  and  Monongahela  may  be  included  in  system  No.  I, 
New  York  Central,  which  controls  one-half  the  stock,  the  Pennsyl- 
vania controlling  the  other  half. 

SYSTEM  No.  3. — BALTIMORE  &  OHIO 

Baltimore  &  Ohio. 

Sandy  Valley  &  Elkhorn. 

Staten  Island  Rapid  Transit. 
Reading  system,  comprising  the  Philadelphia  &  Reading,  Central 

Railroad  of  New  Jersey,  and  various  others. 
Cincinnati,  Indianapolis  &  Western. 
Chicago,  Indianapolis  &  Louisville. 
New  York,  New  Haven  &  Hartford. 

Central  New  England. 
Lehigh  &  New  England. 
Lehigh  &  Hudson. 

NOTES. — The  Baltimore  &  Ohio  Chicago  Terminal  is  reserved  for 
consideration  in  connection  with  terminal  situations. 

The  New  York,  New  Haven  &  Hartford,  Central  New  England, 
Lehigh  &  New  England,  and  Lehigh  &  Hudson  may  be  included  in 
system  No.  7,  New  England,  or  system  No.  7a,  New  England-Great 
Lakes. 

SYSTEM  No.  4. — ERIE 
Erie. 

Chicago  &  Erie. 

New  Jersey  &  New  York. 

New  York,  Susquehanna  &  Western. 
Delaware  &  Hudson. 
Delaware,  Lackawanna  &  Western. 
Ulster  &  Delaware. 
Bessemer  &  Lake  Erie. 
Buffalo  &  Susquehanna. 


372  APPENDIX  II 

Pittsburg  &  Shawmut. 

Pittsburg,  Shawmut  &  Northern. 

Lorain,  Ashland  &  Southern. 

Wabash  lines  east  of  the  Missouri  River. 

NOTES. — Prof.  Ripley  recommends  including  the  Lehigh  Valley  in 
this  system;  but  in  this  tentative  plan  that  carrier  is  proposed  as  a 
main  stem  for  system  No.  5,  Nickel  Plate-Lehigh  Valley. 

The  Delaware  &  Hudson,  Delaware,  Lackawanna  &  Western, 
Ulster  &  Delaware,  Pittsburg  &  Shawmut,  and  Pittsburg,  Shawmut 
&  Northern  may  be  included  in  system  No.  7a,  New  England-Great 
Lakes. 

The  Bessemer  &  Lake  Erie  may  be  included  in  system  No.  5,  Nickel 
Plate-Lehigh  Valley. 

The  Lorain,  Ashland  &  Southern  may  be  included  in  system  No.  2, 
Pennsylvania. 

SYSTEM  No.  5. — NICKEL  PLATE-LEHIGH  VALLEY 

Lehigh  Valley. 

New  York,  Chicago  &  St.  Louis. 
Toledo,  St.  Louis  &  Western. 
Detroit  &  Toledo  Shore  Line. 
Lake  Erie  &  Western. 
Wheeling  &  Lake  Erie. 
Pittsburgh  &  West  Virginia. 
Bessemer  &  Lake  Erie. 

NOTES. — Prof.  Ripley  recommends  the  Lackawanna  as  main  stem 
in  this  system.  In  this  tentative  plan  it  is  replaced  for  that  purpose 
by  the  Lehigh  Valley,  and  made  available  for  either  system  No.  7a, 
New  England-Great  Lakes,  or  system  No.  4,  Erie.  He  also  includes 
the  Buffalo,  Rochester  &  Pittsburgh  and  Wheeling  &  Lake  Erie  in 
this  system. 

The  Bessemer  &  Lake  Erie  may  be  included  in  system  No.  4,  Erie. 

SYSTEM  No.  6. — PERE  MARQUETTE 

Pere  Marquette. 

Detroit  &  Mackinac. 

Ann  Arbor. 

Detroit,  Toledo  &  Ironton. 

Boyne  City,  Gaylord  &  Alpena. 

NOTE. — The  last-named  road  is  a  Class  II  road  not  specifically  cov- 
ered by  Prof.  Ripley's  report. 


APPENDIX  II  373 


SYSTEM  No.  7. — NEW  ENGLAND 

New  York,  New  Haven  &  Hartford. 

New  York,  Ontario  &  Western. 

Central  New  England. 
Boston  &  Maine. 
Maine  Central. 
Bangor  &  Aroostook. 
Lehigh  &  Hudson  River. 
Lehigh  &  New  England. 

NOTES. — Prof.  Ripley  recommends  inclusion  of  the  New  York, 
Ontario  &  Western  in  system  No.  4,  Erie. 

The  Lehigh  &  Hudson  River  is  not  included  in  any  system  under 
Prof.  Ripley's  report,  but  is  left  as  a  "bridge  line." 

SYSTEM  No.  7A. — NEW  ENGLAND-GREAT  LAKES 

Same  as  system  No.  7  with  addition  of  the  following,  which  other- 
wise with  the  exception  of  the  Buffalo,  Rochester  &  Pittsburgh 
may  be  included  in  system  No.  4,  Erie.  That  carrier  may  be 
included  in  system  No.  5,  Nickel  Plate-Lehigh  Valley. 

Delaware  &  Hudson. 

Ulster  &  Delaware. 

Delaware,  Lackawanna  &  Western. 

Buffalo,  Rochester  &  Pittsburgh. 

Pittsburg  &  Shawmut. 

Pittsburg,  Shawmut  &  Northern. 

NOTE. — The  addition  of  these  lines  has  not  been  recommended  by 
Prof.  Ripley. 

SYSTEM  No.  8. — CHESAPEAKE  &  OHIO 

Chesapeake  &  Ohio. 
Hocking  Valley. 
Virginian. 

NOTE. — Prof.  Ripley  recommends  consolidation  of  the  Virginian 
with  the  Norfolk  &  Western,  Toledo  &  Ohio  Central,  and  Kanawha  & 
Michigan,  in  order  to  afford  a  western  outlet  for  coal  originating  on 
the  Virginian.  This  apparently  would  involve  up-grade  eastbound 
haul  of  westbound  coal  to  the  vicinity  of  Roanoke,  unless  there  be  new 
construction  near  Gauley  Bridge,  W.  Va.  The  Virginian's  present 
outlet  'to  the  west  is  via  Deepwater,  W.  Va.,  and  the  Chesapeake  & 
Ohio. 


374  APPENDIX  II 

SYSTEM  No.  9. — NORFOLK  &  WESTERN 

Norfolk  &  Western. 
Toledo  &  Ohio  Central. 

Zanesville  &  Western. 

Kanawha  &  Michigan. 

Kanawha  &  West  Virginia. 

NOTE. — From  the  Norfolk  &  Western  is  excepted  the  branch  from 
Roanoke  to  Winston-Salem,  which  may  be  included  in  system  No.  II, 
Atlantic  Coast  Line-Louisville  &  Nashville  and  the  branch  from 
Lynchburg  to  Durham  which  may  be  included  in  system  No.  12, 
Illinois  Central-Seaboard. 

SYSTEM  No.  10. — SOUTHERN 
Southern. 

Alabama  Great  Southern. 

Georgia,  Southern  &  Florida. 

Mobile  &  Ohio. 

Southern  Railway  in  Mississippi. 

Northern  Alabama. 

Cincinnati,  New  Orleans  &  Texas  Pacific. 
New  Orleans  Great  Northern. 
Alabama  &  Vicksburg. 

NOTE. — Prof.  Ripley  recommends  inclusion  of  the  Georgia  South- 
ern &  Florida  branch  from  Valdosta,  Ga.,  to  Palatka,  Fla.,  in  the  Sea- 
board system. 

SYSTEM  No.  n. — ATLANTIC  COAST  LINE-LOUISVILLE  & 

NASHVILLE 
Atlantic  Coast  Line. 

Atlanta  &  West  Point. 

Charleston  &  Western  Carolina. 

Louisville  &  Nashville. 

Nashville,  Chattanooga  &  St.  Louis. 
Louisville,  Henderson  &  St.  Louis. 
Western  Railway  of  Alabama. 
Richmond,  Fredericksburg  &  Potomac. 
Norfolk  Southern. 
Atlanta,  Birmingham  &  Atlantic. 
Winston-Salem  Southbound. 

Roanoke  to  Winston-Salem  branch  of  Norfolk  &  Western. 
Florida  East  Coast. 


APPENDIX  II  375 

Carolina,  Clinchfield  &  Ohio. 
Georgia  &  Florida. 
Gulf,  Mobile  &  Northern. 
Mississippi  Central. 

NOTES. — Prof.  Ripley  recommends  that  the  Richmond,  Fredericks- 
burg  &  Potomac  and  Florida  East  Coast  retain  their  present  status 
without  inclusion  in  any  system. 

The  Carolina,  Clinchfield  &  Ohio  may  be  included  in  system  No.  12, 
Illinois  Central-Seaboard.  Prof.  Ripley  recommends  inclusion  in 
system  No.  10,  Southern. 

The  Gulf,  Mobile  &  Northern  and  Mississippi  Central  are  not  spe- 
cifically included  in  any  system  under  Prof.  Ripley's  report. 

SYSTEM  No.  12. — ILLINOIS  CENTRAL-SEABOARD 

Illinois  Central. 

Yazoo  &  Mississippi  Valley. 

Central  of  Georgia. 
Seaboard  Air  Line. 

Lynchburg,  Va.,  to  Durham,  N.  C.,  branch  of  Norfolk  &  Western. 
Gulf  &  Ship  Island. 
Tennessee  Central. 
Carolina,  Clinchfield  &  Ohio. 

NOTES. — Prof.  Ripley  recommends  that  a  separate  system  be  built 
around  the  Seaboard  Air  Line. 

The  Gulf  &  Ship  Island  is  not  included  in  any  system  by  Prof.  Ripley. 

The  Carolina,  Clinchfield  &  Ohio  may  be  included  in  system  No.  1 1, 
Atlantic  Coast  Line-Louisville  &  Nashville. 

SYSTEM  No.  13. — UNION  PACIFIC-NORTH  WESTERN 

Union  Pacific. 

St.  Joseph  &  Grand  Island. 

Oregon  Short  Line. 

Oregon- Washington  Railroad  &  Navigation  Company. 

Los  Angeles  &  Salt  Lake. 
Chicago  &  North  Western. 

Chicago,  St.  Paul,  Minneapolis  &  Omaha. 
Lake  Superior  &  Ishpeming. 
Wabash  lines  west  of  the  Missouri  River. 

NOTES. — Prof.  Ripley  recommends  inclusion  of  the  Central  Pacific 
in  this  system. 

The  Lake  Superior  &  Ishpeming  is  not  specifically  included  in  any 
system  by  Prof.  Ripley. 


376  APPENDIX  II 

SYSTEM  No.  14. — BURLINGTON-NORTHERN  PACIFIC 
Chicago,  Burlington  &  Quincy. 
Northern  Pacific. 
Chicago  Great  Western. 
Minneapolis  &  St.  Louis. 
Spokane,  Portland  &  Seattle. 

NOTES. — From  the  Chicago,  Burlington  &  Quincy  are  excepted  the 
Colorado  &  Southern  and  Fort  Worth  &  Denver  City,  which  may  be 
included  in  system  No.  16,  Santa  Fe.  Prof.  Ripley  recommends  that 
they  be  included  in  system  No.  19,  Chicago-Missouri  Pacific. 

Prof.  Ripley  recommends  extension  of  this  system  to  the  Pacific 
coast  by  including  the  Denver  &  Rio  Grande  and  the  Western  Pacific. 
He  also  recommends  redistribution  of  portions  of  the  Minneapolis  & 
St.  Louis  and  Chicago  Great  Western. 

The  Spokane,  Portland  &  Seattle  may  be  included  in  system  No.  15, 
Milwaukee-Great  Northern. 

SYSTEM  No.  15. — MILWAUKEE-GREAT  NORTHERN 
Chicago,  Milwaukee  &  St.  Paul. 
Great  Northern. 

Chicago,  Terre  Haute  &  Southeastern. 
Duluth  &  Iron  Range. 
Duluth,  Missabe  &  Northern. 
Green  Bay  &  Western. 
Spokane,  Portland  &  Seattle. 
Butte,  Anaconda  &  Pacific. 

NOTES. — The  Green  Bay  &  Western  and  Butte,  Anaconda  &  Pacific 
are  not  included  in  any  system  under  Prof.  Ripley's  report. 

The  Spokane,  Portland  &  Seattle  may  be  included  in  system  No.  14, 
Burlington-Northern  Pacific. 

Prof.  Ripley  recommends  that  the  eastern  half  of  the  Chicago  & 
Eastern  Illinois  be  included  in  this  system. 

SYSTEM  No.  16. — SANTA  FE 
Atchison,  Topeka  &  Santa  Fe. 

Gulf,  Colorado  &  Santa  Fe. 
Colorado  &  Southern. 

Fort  Worth  &  Denver  City. 
Denver  &  Rio  Grande. 
Western  Pacific. 
Utah  Railway. 
Northwestern  Pacific. 
Nevada  Northern. 


APPENDIX  II  377 

NOTES. — Prof.  Ripley  recommends  inclusion  of  the  Colorado  & 
Southern  and  the  Fort  Worth  &  Denver  City  in  the  Missouri  Pacific 
system.  He  also  recommends  inclusion  of  a  part  of  the  Gulf  Coast 
Lines  in  the  above  system. 

Prof.  Ripley  recommends  that  the  Northwestern  Pacific  retain  its 
present  status. 

The  Nevada  Northern  is  not  specifically  included  in  any  system  by 
Prof.  Ripley.  It  may  be  included  in  system  No.  17,  Southern  Pacific- 
Rock  Island. 

SYSTEM  No.  17.— SOUTHERN  PACIFIC-ROCK  ISLAND 

Southern  Pacific  Company. 

Nevada  Northern. 

Chicago,  Rock  Island  &  Pacific. 

Chicago,  Rock  Island  &  Gulf. 
Arizona  &  New  Mexico. 
El  Paso  &  Southwestern. 
San  Antonio  &  Aransas  Pass. 
Trinity  &  Brazos  Valley. 
Midland  Valley. 

Vicksburg,  Shreveport  &  Pacific. 
Chicago,  Peoria  &  St.  Louis. 

NOTES. — The  Nevada  Northern  may  be  included  in  system  No.  16, 
Santa  Fe. 

The  Arizona  &  New  Mexico  and  Chicago,  Peoria  &  St.  Louis  are  not 
specifically  included  in  any  system  by  Prof.  Ripley. 

The  Trinity  &  Brazos  Valley  may  be  included  in  system  No.  1 8, 
Frisco-Katy-Cotton  Belt.  So  recommended  by  Prof.  Ripley. 

Prof.  Ripley  recommends  redistribution  of  portions  of  the  carriers 
included  by  us  in  this  system. 

SYSTEM  No.  18. — FRISCO-KATY-COTTON  BELT 

St.  Louis-San  Francisco. 

St.  Louis  Southwestern. 

Louisiana  Railway  &  Navigation  Company. 

Chicago  &  Alton. 

Missouri,  Kansas  &  Texas. 

Trinity  &  Brazos  Valley. 

San  Antonia,  Uvalde  &  Gulf. 

NOTES. — The  Trinity  &  Brazos  Valley  may  be  included]  in  system 
No.  17,  Southern  Pacific- Rock  Island. 

Prof.  Ripley  recommends  inclusion  of  the  San  Antonio,  Uvalde  & 


APPENDIX  II 

Gulf  in  either  system  No.  17,  Southern  Pacific-Rock  Island,  or  in  a 
Southwestern-Gulf  system. 

Prof.  Ripley  recommends  redistribution  of  portions  of  the  carriers 
included  by  us  in  this  system. 

SYSTEM  No.  19. — CHICAGO-MISSOURI  PACIFIC 

Chicago  &  Eastern  Illinois. 
Missouri  Pacific. 
Kansas  City  Southern. 
Kansas  City,  Mexico  &  Orient. 
Kansas,  Oklahoma  &  Gulf. 
Texas  &  Pacific. 
Fort  Smith  &  Western. 
Louisiana  &  Arkansas. 
Gulf  Coast  Lines. 
International  &  Great  Northern. 

NOTE. — Prof.  Ripley  recommends  redistribution  of  portions  of  the 
carriers  included  by  us  in  this  system. 

Certain  lines  such  as  the  Minneapolis,  St.  Paul  &  Sault  Ste. 
Marie,  and  the  Central  Vermont,  which  are  controlled  by  Canadian 
carriers,  have  not  been  specially  included  in  this  tentative  plan, 
because  these  lines  form  parts  of  through  trans-continental  Cana- 
dian systems  in  active  competition  with  systems  above  set  forth. 

The  carriers  included  in  this  tentative  plan  comprise  most  of 
the  Class  I  steam  railroads  but  very  few  of  those  in  class  II  and 
Class  III.  Those  not  so  included,  whether  industrial  common 
carriers,  terminal  carriers,  interurban  electric  railways  operated 
as  a  part  of  general  steam-railroad  systems  of  transportation  or 
engaged  in  the  general  transportation  of  freight,  "short  lines," 
or  others,  will  be  considered  at  the  hearings  to  be  hereafter  assigned 
so  that  in  the  plan  to  be  ultimately  adopted  provision  can  be  made 
for  their  inclusion  in  the  systems. 

We  have  not  specifically  mentioned  water  carriers.  Where 
these  carriers  are  now  controlled  by  carriers  by  rail  they  will  be 
considered  as  being  included  tentatively  in  the  systems  in  which 
the  controlling  rail  carrier  has  been  included. 


INDEX 


INDEX 


Accounting,  history  of  development  of 
uniform,  61-63;  amendments  of  1006, 
63;  present  condition  of  accounting 
system,  63;  inspection,  63-64;  viola- 
tion of  accounting  rules,  64-66;  econ- 
omies of  war  administration,  149. 

Adjustment  boards,  311,  328;  war  ad- 
ministration, 184-188. 

Advertising  and  traffic  solicitation,  147. 

American  Railway  Express  Company, 
152,  280. 

Anti-strike  legislation,  310-311,  356. 

Association  of  Railway  Executives,  pro- 
posals for  legislation,  219. 

Bibliography,  369-370. 

Blanket-rate  system,  34. 

Bondholders,  their  relation  to  railroad 

management,  220. 
Border  troubles,  railroad  committee  on, 

107. 
Brotherhoods,  "concerted"  movements 

by,  89. 

Capitalization,  regulation  of,  in  Act  of 
1910,  284;  relation  to  rates,  284-286; 
conflict  of  federal  and  state  jurisdic- 
tion, 290;  legislation  of  1920,  291;  in- 
terpretation of  powers  by  commission, 
292. 

Capitalization  of  surplus,  Commission 
decision,  296-299. 

Car-service,  organization,  in;  legisla- 
tion, i ii ;  in  Act  of  1920,  301. 

Certificate  of  public  convenience,  304. 

Chamber  of  Commerce  of  U.  S.,  propo- 
sals for  legislation,  219. 

Chicago,  Burlington  and  Quincy  R.  R., 
validation  of  its  securities,  296. 

Coal-zoning,  145. 

Commerce  Court,  long  and  short  haul 
decision,  36;  reasons  for  its  creation, 
43;  conflicts  with  Commission,  44-51; 
political  reasons  for  its  demise,  50-51. 


Commodities  clause,  history,  54-56;  Su- 
preme Court  decisions,  55-58;  Com- 
mission's attitude,  58. 

Commodity  statistics,  307. 

Competition  in  service,  contrasted  with 
competition  in  rates,  274-277. 

Consolidated  ticket  office,  146-147. 

Consolidation,  partial,  269;  complete, 
269;  Commission  plan  for,  270,  371- 
380;  constitutionality,  277;  compul- 
sory v.  voluntary,  277;  relation  to 
co-operation,  345. 

Co-operation,  344-365;  in  rate  matters, 
14-15;  in  operating  economies,  345- 
357;  with  highways,  358-360;  with 
waterways,  360-363. 

Correspondence,  access  to,  judicial  rul- 
ings, 305-306. 

Cost  accounting,  67-68,  306. 

Council  of  National  Defense,  relation  to 
transportation,  108. 

Daylight-saving,  52. 

Decline  in  railroad  credit,  1910-1916, 

reasons,  24. 
Delaware,    Lackawanna   and   Western 

R.  R.,  validation  of  its  securities,  296. 
Depreciation,    accounting   for,    66-67; 

Act  of  1920,  304. 

Discrimination,  existing  methods  of,  53. 
Division  of  Public  Service,  171. 

Eight-hour  day,  the  controversy  and  at- 
tempts at  settlement  by  the  Presi- 
dent, 97-100;  the  law,  100;  constitu- 
tionality of  the  statute,  101-103;  re- 
port of  Eight  Hour  Commission,  103. 

Elimination  of  passenger-service,  133- 

137- 

Equipment,  pooling  of,  350,  351. 
Erdman  Act,  89-90. 
Esch  Car-service  Act,  in. 
Express   companies,   consolidation   of, 
280. 


382  INDEX 

Express  rates,  construction  of  rate  sys- 
tem, 59. 

Extension  of  government  control,  Mc- 
Adoo  proposal,  215-217. 

Federal  Control  Act,  123-125;  super- 
sedes Interstate  Commerce  Act,  167- 
168. 

Federal  incorporation,  282-283. 

Federal  operation,  its  purpose,  133;  ad- 
ministrative organization  for,  133- 
134;  "economies"  of,  135-141;  sum- 
mary of,  155-157,  206-210. 

Finances  of  Railroad  Administration, 
funds  available,  192-194;  operating 
costs,  194-197;  capital  expenditures, 
197-200;  miscellaneous  investments, 
200-201;  the  guarantee  period,  201; 
loans  to  the  roads,  203-206;  summary, 
206. 

Financial  mismanagement,  286-290. 

Five  Per  Cent  Case  of  1914,  16-18. 

Freight  bills,  cash  payment  of,  308. 

Freight  forwarding  and  rates,  25. 

Freight  traffic  committees,  168-169. 

Government  assumption  of  operation, 

119;  reasons  for,  119-122. 
Government  operation,  343-344. 
Government  ownership,  342. 
Granger  cases,  258. 
Guarantee  period,  225. 

Handling  of  troops  and  military  sup- 
plies, 115. 
Holding  companies,  295. 

Illinois  Central  Car-Distribution  Case, 

45-46. 

Intercorporate  directors,  294. 

Interstate  Commerce  Act,  summary  of 
period,  1887  to  1006,  1-4. 

Interstate  Commerce  Commission,  pro- 
posals of  legislation  after  the  war,  218; 
reorganization  of,  247. 

Labor,  efficiency  during  the  war,  189; 

unnecessary  employees,  100. 
Labor  arbitrations,  92-93;  criticism  of 

arbitration  method,  94-97. 
Labor  code,  324. 
Labor  legislation,  Act  of  ig?o,  312-314. 


Labor  problem,  situation  in  1917,  178- 
179;  problem  of  co-operation,  352- 
357- 

Lemon  Case,  49-50. 

Limitation  of  state  authority,  Act  of 
1920,  262-267;  decisions  of  Interstate 
Commerce  Commission,  264-265. 

Loading  and  movement  of  trains,  113. 

Long  and  short  haul  clause,  history,  28- 
30;  amendment  in  1910,  30;  interpre- 
tation by  the  Commission  in  passen- 
ger business,  31;  in  freight  service  in 
the  South,  32;  in  transcontinental 
traffic,  33-40;  attitude  of  Railroad 
Administration,  173;  amendments  of 
1920,  253. 

Mail  pay,  history  of,  59-60;  introduction 
of  parcel-post,  60;  Act  of  1916, 60;  de- 
cision of  Commission,  1919,  61. 

Market  competition,  34,  36. 

Medals  of  honor,  52. 

Merchant  Marine  Act,  338. 

Minimum  rates,  255-257. 

Minnesota  Case,  259. 
Mississippi  and  Warrior  Waterways  Sec- 
tion, success  of,  154. 

National  agreements,  188,  320-324. 

National  Association  of  Owners  of  Rail- 
road Securities,  proposals  for  legisla- 
tion, 219;  plans  for  co-operation,  351. 

New  England  rate  situation,  242. 

New  York  Barge  Canal,  operation  on, 
153-155;  withdrawal  of  Government 
from,  335. 

New  York  Harbor  Case,  26. 

Newlands  Act,  91-92. 

Norfolk  and  Western  Passenger  Case, 
27. 

North  Dakota  Coal  Case,  26. 

Oldham,  John  E.,  consolidation  plan, 

271-272. 

Operating  efficiency  in  1917,  116. 
Operating  statistics,  308. 
Operating  Statistics  Section,  147-149. 

Pacific  Coast  Switching  Cases,  47-48. 
Panama  Canal  Act,  83-84;  decisions  of 

Commission,  84-86. 
Parcel-post  rates,  52. 


INDEX 


383 


Pennsylvania  R.  R.,  labor  controversy 
on,  328-331. 

Permit  system,  130. 

Pipe-lines,  regulating  authority  sus- 
tained, 52. 

Plumb  plan,  223-224. 

Pooling  clause,  Act  of  1920,  278. 

Pooling  of  equipment,  113;  143-145. 

Priority  Act,  112. 

Proclamation  of  President  taking  pos- 
session of  roads,  122. 

Proctor  and  Gamble  Case,  48-49. 

Property  accounts,  improvement  in,  65. 

Railroad  Administration,  rate  policy, 
169,  172. 

Railroad  Labor  Board,  organization, 
313;  decisions,  313-319;  power  to  en- 
force decisions,  319;  national  agree- 
ments, 324. 

Railroads'  War  Board,  origin  of,  109;  its 
problems  and  the  degree  of  its  suc- 
cess, 117-118. 

Rate  cases,  in  1910,  15;  1911  to  1916, 
18-22;  1920,  240,  244. 

Rate  section,  Act  of  1910,  8-10. 

Rate  section,  Act  of  1920,  227-229;  not 
a  guarantee,  229;  elastic  limit  to  earn- 
ings, 231;  constitutionality,  235;  prac- 
tical working,  236-238;  significant  fea- 
tures, 244;  rate  suspension,  247,  249. 

Rates,  War  Administration,  methods  of 
increase,  159;  effect  of  increase  on  net 
revenue,  159-161;  comparison  with 
commodity  prices,  162;  criticism  of 
Administration  policy,  161-164. 

Rebates,  see  Discrimination. 

Reduction  of  salaries,  141. 

Refund  procedure,  Act  of  1920, 250-252; 
in  reparation  cases,  250. 

Rental  payment  for  roads,  129-130. 

Return  on  property  investment,  23. 

Ripley,  W.  Z.,  consolidation  plan,  270. 

Safety  legislation,  76-80;  appliances  re- 
quired, 76-77;  block  signals,  77,  79; 
the  human  element,  77;  derailments, 
78;  trespassing,  78;  automatic  train- 
control,  79;  Act  of  1920,  79;  Hours  of 
Service  Act,  80;  court  decisions,  259. 

Sailing-day  plan,  142-143. 

Separation  of  operating  expenses,  68. 


Shipping  Act,  338. 

Shipping  Board,  conflict  with  Commis- 
sion, 338. 

Short-line  contract,  130-132. 

Shreveport  Cases,  260-261. 

Standard  contract,  126-129;  number 
signed,  129. 

Standard  return,  number  of  roads  earn- 
ing, 161. 

Standardized  maintenance,  149-151; 
standardization  in  equipment  manu- 
facture, 150-151. 

State  railroad  commissions,  attitude  of 
Railroad  Administration  toward,  174- 
176. 

Statistics  of  finance  and  operation,  1908- 
1916,  22-23. 

Suspension  of  rate  schedules,  7-13. 

"Tap-lines,"  53;  Supreme  Court  deci- 
sion, 54. 

Telegraph  and  telephone  companies, 
control  of,  52. 

Terminals,  joint  use,  Act  of  1920,  302- 
304;  co-operation  in,  346-349;  operat- 
ing costs,  349. 

Transportation  Act  of  1920,  legislative 
history  of,  214-225. 

Unification  of  terminal  facilities,  137- 

140. 
Uniform  classification,  164-166. 

Valuation,  69-76;  the  statute,  70;  organ- 
ization of  bureau,  71;  present  status 
of,  72;  land  values,  72;  "final  value" 
as  already  found  by  Commission,  73; 
relation  to  rates,  74-75;  relation 
to  consolidation  and  capitalization 
clauses  of  Act  of  1920,  75;  present 
valuation  of  properties,  238. 

Wabash  v.  Illinois,  258. 

Wages,  increases  1918-1920,  180-184; 
relation  to  rates,  332-334. 

War  legislation  relating  to  railroads,  no. 

Water  carriers,  reports  of,  65. 

Water  competition,  in  the  South,  32;  to 
Pacific  points,  34-40;  interpretation  of 
1910  amendment  by  Supreme  Court, 
41-42;  in  the  Southeast  after  the  war, 
254- 


384  INDEX 

Water  transportation,  relation  to  rail-  "Weak  and  strong  road"  problem,  232- 

roads,  81-84;  control  of,  in  Act  of  234,  274. 

1887,  82;  interpretation  of  power  by  Willamette  Valley  Lumberman's  Asso- 

Commission,  82;  legislation  requiring  ciation  case,  172. 
physical  connections,  87;  investigation 

of,  336;  jurisdiction  of  Commission  Zone  system  in  trans-continental  rates, 

over,  337.  3S-36. 


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